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THE CAUSE AND EXTENT OF THE RECENT INDUS- 
TRIAL PROGRESS OF GERMANY. By Earl D. Howard. 

THE CAUSES OF THE PANIC OF 1893. By William J. 
Lauck. 

INDUSTRIAL EDUCATION. By Harlow Stafford Person, 

FEDERAL REGULATION OF RAILWAY RATES. By Al- 
bert N. Merritt, Ph.D. 

SHIP SUBSIDIES. An Economic Study of the Policy of Sub- 
sidizing Merchant Marines. By Walter T. Dunmore. 

SOCIALISM: A CRITICAL ANALYSIS. By O. D. Skelton. 

INDUSTRIAL ACCIDENTS ANDTHEIR COMPENSATION. 
By Gilbert L. Campbell, B. S. 

THE STANDARD OF LIVING AMONG THE INDUSTRIAL 
PEOPLE OF AMERICA. By Frank H. Streightoff. 

THE NAVIGABLE RHINE. By Edwin J. Clapp. 

HISTORY AND ORGANIZATION OF CRIMINAL STATIS- 
TICS IN THE UNITED STATES. By Louis Newton 
Robinson. 

SOCIAL VALUE. By B. M. Anderson, Jr. 

FREIGHT CLASSIFICATION. By J. F. Strombeck. 

WATERWAYS VERSUS RAILWAYS. By Harold Glenn 
Moulton. 

THE VALUE OF ORGANIZED SPECULATION. By Harri- 
son H. Brace. 

HOUGHTON MIFFLIN COMPANY 

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XIV 

THE VALUE OF ORGANIZED 
SPECULATION 



THE VALUE OF 
ORGANIZED SPECULATION 



BY 



HARRISON H. BRACE 

Author of " Gold Production and Future Prices ' 







BOSTON AND NEW YOKK 

HOUGHTON MIFFLIN COMPANY 

<fff)t fiifcerjHbe $re#* Cambribge 

1913 



-31 



COPYRIGHT, I913, BY HART, SCHAFFNER 8c MARX 
ALL RIGHTS RESERVED 

Published April IQ13 



CI.A347140 



PREFACE 

This series of books owes its existence to the generosity of 
Messrs. Hart, Schaffner & Marx, of Chicago, who have 
shown a special interest in trying to draw the attention of 
American youth to the study of economic and commercial 
subjects. For this purpose they have delegated to the 
undersigned committee the task of selecting or approving 
of topics, making announcements, and awarding prizes 
annually for those who wish to compete. 

For the year ending June 1, 1911, there were offered: — 

In Class A, which included any American without 

restriction, a first prize of $1000, and a second prize of $500. 

In Class B, which included any who were at the time 

undergraduates of an American college, a first prize of $300, 

and a second prize of $200. 

Any essay submitted in Class B, if deemed of sufficient 
merit, could receive a prize in Class A. 

The present volume, submitted in Class A, was awarded 
the second prize in that class. 

J. Laurence Laughlin, Chairman, 
University of Chicago. 
J. B. Clark, 

Columbia University. 
Henry C. Adams, 

University of Michigan. 
Horace White, 

New York City. 
Edwin F. Gay, 

Harvard University. 



AUTHOR'S PREFACE 

In this short monograph the attempt is made to consider in 
a spirit of fairness the much controverted question of the 
value of organized speculation. The undertaking is a dif- 
ficult one from the fact that the exchanges themselves are 
in a formative stage, as is also public opinion concerning 
them; and the positions taken by the respective disputants 
are far apart. 

The question of prices is an abstruse one ; and, in the 
subject under discussion, we must attempt to discriminate 
between the price-making factors which are general in their 
effects and those which are peculiar to the exchanges. Yet 
the elements which determine prices blend into one another 
almost indistinguishably. As regards the general effects of 
organized speculation upon business, the matter is beset 
with further complications; and it is almost impossible to 
express one's self with accuracy about the various phases 
which the facts assume, without appearing to make con- 
tradictory statements. 

Upon a commercial exchange the weaknesses of human 
nature are exhibited at every point. The hopes and fears of 
the persons involved, the peculiar nature of an organization 
which leaves individuality untrammeled, but at the same 
time gives opportunity for the display of the mysterious 
psychology of a crowd, as well as the temptations of the 
gambling spirit, are among the factors to be considered. 
All these and other determinants act and react upon one 
another in great complexity. It is impossible to reduce the 
discussion to a few simple formulas and rules, or even from 
an extensive consideration of statistics to formulate a 
machine-made plan for accurately describing the head, 
the brain, — the nervous system of our modern commerce. 



viii AUTHOR'S PREFACE 

The writer therefore asks the indulgence of his readers if 
he be obliged in some cases to point out that causes and 
effects are so intermixed that definite conclusions cannot 
be reached in regard to particular departments of the sub- 
ject, or if he fail to reduce his discussion of ever varying 
human moods and passions to the regularity of a mathe- 
matical diagram. 

Organized speculation is important in the present. It 
will become of much greater importance in the future. As 
hinted in the text, it contains within itself suggestions for 
the solution of social problems which are the present-day 
puzzle of statesmen and philanthropists. It is worthy of the 
study of specialists in economics, in ethics, and in psycho- 
logy; and it is of such practical importance that it should 
receive attention and consideration from all classes of the 
people. In order to help, even if it be but little, in awaken- 
ing a wide interest in the discussion of the subject, the 
writer has attempted wherever possible to use the popular 
style. 

Harrison H. Brace. 

Chicago, December, 1912. 



CONTENTS 



INTRODUCTION 

The Chance Element 4 

Guarding against Risk 5 

The Place of the Speculator 5 

The System adopted 7 

Evolution and History 8 



CHAPTER I 

Features of Organized Speculation 15 

The Commercial Exchange 15 

The Method of doing Business 19 

The Orders 21 

Distributing Quotations and News 25 

Describing the Market 29 

Margin Trading 31 

Future Delivery 32 

Short Selling 34 

Borrowing 36 

Substitution 37 

Cancellation of Trades 39 

Ringing Out ,j 40 

Book Accounts 43 

The Clearing-House 44 

A Distinguishing Feature 45 

Speculators classified 46 



CHAPTER n 

The Effect upon Prices 50 

The Minor Fluctuations 51 

Extreme Fluctuations 54 

A Market with Two Sides 59 

The Excitability of Speculators 64 

A Summary 65 

Depressing Prices 65 

The Demand and Supply 67 

The Temper of the Speculators 71 



CONTENTS 

Comers 78 

The Commodity in Store 80 

The Street Supply of Stocks 85 

Different Nations and Classes 87 

Cotton Exchanges 89 

Summary of the Upward Tendencies 92 

The Complication of Prices — A General View 94 

Summary of the Three Price Tendencies 96 



CHAPTER ni 

Prices (continued) Some Fallacies considered ... 97 

The Underlying Fallacy 100 

Selling Four Times 102 

The Offers to sell 104 

Philanthropy 105 

The Payment of Differences 107 

The Interest of the Parties 108 

The Strength of the Parties 112 

Different Seasons , 115 

Statistical Fallacies 120 

The Question of Commissions 121 

Clearing-House Transactions 123 

Hedging misunderstood 125 

Restricting Trade 126 

Commerce is Natural « 127 

The Legitimacy of Fluctuations 128 

Summary of the Last Two Chapters ....... 138 



CHAPTER IV 

Indirect Effects 141 

A Continuous Market 141 

Panics 144 

Amateurism again 145 

Hedging 151 

The World Market 159 

The Directive Function 162 

The Directive Influence of the Securities Market .... 163 

General Business Predictions 165 

Some Exceptions considered 167 

A Reduction in Costs 169 

The Husbanding of Resources .*" . . 176 

Publicity 177 

Summary of the Chapter .......... 178 



CONTENTS xi 

CHAPTER V 

Moral and Social Value 180 

The Gambling Spirit 180 

A Charge that is True 184 

Corporate Dishonesty 186 

False Rumors 189 

The Crop Killer 191 

Some Discrepancies and Contradictions 193 

The Test 197 

A Summary 198 

A Historical Explanation 199 

CHAPTER VI 

The Alternative 203 

A Natural Development 203 

The Problem 204 

A Crippled Market 205 

Monopoly 205 

A Four-sided Contest 214 

A Democratic Institution 220 

A Monopoly of Commissions 221 

Real Gambling 222 

Unorganized Speculation 225 

Speculative Business 227 

Evasion 230 

Reforms in Method 233 

Exchanges that are not Exchanges 235 

Eliminating Uncommercial Practices 238 

Eliminating Amateurism 242 

Summary of the Chapter 250 

CONCLUSION 

Summing Up — Important Facts to be Emphasized — 
The Faults of Organized Speculation as it exists 

To-Day — Its Value ln its Ideal Form .... 253 

The Value of Organized Speculation as shown by Present Ten- 
dencies 257 

Postscript — Present Legislative Tendencies 262 



xii CONTENTS 

APPENDIX 

Table I. Yearly Range of Wheat Prices at Chicago . . . .269 

Table II. Yearly Range of Corn Prices at Chicago . . .270 

Table III. Yearly Range of Cotton Prices at New York (cents per 
pound) 271 

Table IV. Mean Monthy Price Contract Wheat (cash) at Chi- 
cago, 1901-1910 (cents per bushel) 272 

Table V. Mean Monthly Price No. 2 Corn (cash) at Chicago, 
1901-1910 (cents per bushel) 272 

Table VI. Average Monthly Price Middling Upland Cotton at 
New York, 1900-1909 (cents per pound) . . . . . .273 

Table VII. Mean Monthly Price Contract Wheat (cash) at 
Chicago by Years ending June 30 (cents per bushel) . . . 273 

Table VIII. Visible Supply of Wheat in Millions of Bushels by 
Years ending June 30 274 

Table IX. Mean Monthly Price No. 2 Corn (cash) by Years 
ending June 30 (cents per bushel) 274 

Table X. Visible Supply of Corn in Millions of Bushels by Years 
ending June 30 275 

Table XI. Average Monthly Price Middling Uplands Cotton in 
New York by Years ending August 31 (cents per pound) . . 275 

Table XII. Visible Supply of American Cotton in Millions of Bales 
by Years ending August 31 276 

Table XIII. Relative Prices of Stocks compared with Relative 
Railway Dividends and Net Income by Years ending June 30, 
1891-1909, Arithmetic Means 276 



LIST OF DIAGRAMS 



I. Yearly Range of Wheat Prices at Chicago 1865-1910 . . 56 
II. Yearly Range of Cora Prices at Chicago 1865-1910 . . 56 

III. Yearly Range of Cotton Prices at New York 1830-1909 . 57 

IV. Prices of Wheat and Corn 1901-1910 and of Cotton 1900- 

1909 averaged by Months 117 

V. Average Prices of Wheat and Average Visible Supply (re- 
versed) years ending June 30 133 

VI. Average Prices of Cora and Average Visible Supply (re- 
versed) years ending June 30 134 

VII. Average Prices of Cotton and Average Visible Supply (re- 
versed) years ending August 31 135 

VIII. Relative Railway Dividends, Net Income and Prices of Stocks 

years ending June 30 137' 



THE VALUE OF ORGANIZED 
SPECULATION 



THE VALUE OF ORGANIZED 
SPECULATION 

INTRODUCTION 

The subject of this essay will appear to most minds a 
strange one. "What can be gained," the extremist will 
ask, "from a discussion of the value of organized specula- 
tion, when it is perfectly obvious that it has no value and 
only leads to human misery? Surely, it needs no argument 
to prove that suicide should not be encouraged or that 
defalcations in positions of trust are not desirable." 
"What," exclaims the ardent sentimentalist, "can be 
more plain than that it is all pure gambling? And why not 
sweep the whole accursed thing away, instead of discussing 
the question of its possible usefulness?" 

But organized speculation, though it be the common 
scapegoat, still survives: and though Germany, for in- 
stance, has made drastic attempts to change the methods 
by which certain commodities and securities are dealt in on 
the bourses, yet she has met with no real success. In the 
meantime exchanges prosper; their memberships become 
more and more valuable; and they build more and more 
costly palaces in which to conduct their business. May it 
not be that prejudice is the cause of much of this outcry? 
And are we perfectly certain that the frequent charges 
made have been conclusively proven? Thus, is there any 
proof for the charge that transactions upon the board of 
trade have nothing to do with actual commodities, and 
that no deliveries are made on future contracts? Surely, 
some of the statements so often heard are unfounded; and 
random assertions made without investigation should not 
be accepted as truth. 



n 



4 VALUE OF ORGANIZED SPECULATION 

If the business of speculation were not the subject of pre- 
judice, it would be the only business which has not, at one 
time or another, been under suspicion. War, at one time, 
was considered as the only proper calling for a gentleman; 
and trade was thought to be quite degrading in its effects. 
Even greater than the prejudice against merchants was 
that against money lenders, tax collectors, or bankers. We 
find the actor at certain periods looked down upon. Even 
the profession of letters has been considered an inferior one; 
and there are those who argue that one of the reasons which 
led Sir Walter Scott to deny he wrote the Waverley Novels, 
was that he did not wish to be known as a professional 
author. 

The writer of this holds no brief for the board of trade or 
the stock exchange. He merely asks the reader to examine 
with him the arguments that may be urged in regard to the 
value of organized speculation, considering at the same time 
those disadvantages which serve to diminish that value, or 
even, in some respects, to overshadow it. 

The Chance Element 

He who would abolish chance from human affairs will 
have an impossible task. The truths that underlie the 
world may be imagined; but when we come to practical 
affairs, we find that there is an element of risk in all things. 
The first hunter who sought to entrap game found that his 
catch at different times was unequal. The agriculturalist 
is engaged in a calling in which there is certainly a great 
amount of risk. Such factors as drought, moisture, and 
other elements which determine whether crops shall be 
good or bad are governed, many of them, by the purest 
chance. In undertaking any business enterprise, the care- 
ful business man in his calculations always allows for the 
risk which he well knows that he must face. 



INTRODUCTION 5 

Guarding against Risk 

It is natural that the world should seek to eliminate this 
risk; and much of the progress in the sciences and practical 
arts is due to increasing knowledge of the comparative 
risks of different courses of action. By studying every 
factor necessary to the accomplishment of a particular 
task, the head of an industry is able to select that course 
which will be least fraught with danger. 

But the most expedient method, even after it has been 
carefully selected, has risks associated with it which cannot 
be eliminated and which must be guarded against by some 
form of insurance or a system that is analogous to insurance. 
There are such perils as those of fire, storm, and death 
which are guarded against directly by insurance, the method 
being to spread them over a greater area. Thus risks are 
so distributed that losses in one area are compensated by in- 
surance premiums in another. The different forms of in- 
surance that have been invented are remarkable for their 
number and variety; nevertheless, there are many impor- 
tant risks that cannot be directly provided for in that way, 
but in the case of which a system analogous to that of insur- 
ance must be used. These are the general risks of business, 
which are infinite in the variations that they assume. 

The Place of the Speculator 

Some of these general risks, which cannot be borne by 
insurance, can yet be undertaken by a class of business 
men who specialize as speculators. These are the risks of 
fluctuations in prices due to changing conditions in differ- 
ent periods of time, and the handling of them constitutes 
the most important function of the speculative exchanges. 
In the case of the prices of the majority of commodities, 
these speculative risks are bound up with general business 
conditions in such a way that they cannot be separated 
from the other causes of expense and assumed by any spe- 



6 VALUE OF ORGANIZED SPECULATION 

cial class. But by speculation, and particularly by the 
machinery of organized speculation, many of these risks 
can be thus segregated and transferred. 

It should be noted, however, that while the function of 
the speculator is similar in many respects to that of the 
insurer, the method by which his influence is applied to the 
world of commerce is quite different. It is not through a 
contract whereby he agrees to indemnify the public against 
loss that the speculator acts; but he performs his function 
by buying and selling in the market. When he believes that 
prices are low, he purchases. When he believes that prices 
are high, he sells. This he does in the pursuit of his own self- 
ish interests; but, in so doing, his purchases and sales have 
an important influence upon prices, and indirectly upon the 
whole field of commerce. 

Thus it is readily seen that the action of the speculator 
affects only indirectly the demand and supply of actual 
commodities and securities. What he buys at one time as 
a speculator, he must at some other time sell; for the imme- 
diate effects of his speculations are neither to produce com- 
modities nor to consume them. He neither adds to the per- 
manent supply nor subtracts from it. But for the moment, 
at the time of a purchase or sale, he exercises an important 
influence upon the temporary demand and supply, with 
far-reaching effect upon ultimate production and consump- 
tion. Or, to look at the question in a slightly different 
aspect, he distributes the demand and supply over different 
periods of time. 

To sum up the above description in a definition, we have 

the following: Speculation is the forecasting of changes in 

value, and buying or selling in order to take advantage of 

them. 1 It is unnecessary, however, in this place to discuss 

the question to what class of producers the speculator 

1 Cf. Report of Governor Hughes's Committee on Speculation in Securities 
and Commodities, p. 3; Emery, Speculation upon the Stock and Produce 
Exchanges of the United States, p. 96; Chamberlain, The Principles of Bond 
Investment, p. 8. 



INTRODUCTION 7 

belongs — whether, for instance, his services are a part of 
those performed by the capitalist or by the entrepreneur. 
That there is risk and that some one must bear it seems 
obvious; and the particular risks that the speculator bears 
are as important as any. 

The System adopted 

It is quite natural that the organizing tendency of 
modern commerce should be availed of by speculators as 
well as others ; and the form which speculation takes when 
organized is that of operations upon an exchange. It should 
be noted, however, at this point that there are different 
kinds of organization. There is the form which aims to 
crush out individual initiative wherever possible; and there 
are other forms in which the uniting force is applied in such 
a way that, while there is constraint at certain points, yet 
in most respects freedom of action and individual initiative 
are greatly increased. 

An exchange organization is of this latter class, for its 
tendency is to promote commercial freedom rather than to 
smother it. A clique or pool may exist upon an exchange in 
the same way that one may exist in outside commerce. But 
the exchange organization is entered into for the purpose of 
promoting, not of stifling, competition; and its machinery is 
so arranged as to give the opposing price-making factors 
the freest play. 

It would, therefore, be quite fallacious to compare the 
organization of a commercial exchange to that of an army, 
whose constituent units are drilled to act in unison against 
a common enemy for the accomplishment of a particular 
purpose. A better use of the simile will be found in com- 
paring the exchange to an organization formed for the pur- 
pose of conducting gladiatorial combats, in which the rules 
are so carefully framed that any one can have a chance to 
demonstrate any superiority he may have, and where only 
the fit survive. 



8 VALUE OF ORGANIZED SPECULATION 

A definition might then be framed as follows : Organized 
speculation is a system of bringing together speculators and 
other traders with a view to facilitating the freest trading 
among them, so that many of the risks of commerce may be 
segregated and borne by a class who specialize in the under- 
taking. The effect of this system, and particularly its value 
to the community, will form the subject of this essay. 

Evolution and History 

Little light can be thrown upon the subject by merely 
using our imagination as a basis for reasoning in regard to 
what must have been the place of speculation in past ages. 
It doubtless originated in the earliest forms of trading. 
Even among people in a low state of commercial develop- 
ment, it would be natural for those with a little more apti- 
tude for commerce than the rest to take advantage of fluc- 
tuations in values, as did Joseph in Egypt. Little, however, 
can be learned from a study of the rudimentary forms of 
exchanges, since the types which developed later are quite 
different in character. 

More significant for our purposes is the appearance of 
exchanges such as the Royal Exchange in London. This 
exchange was built through the generosity and public 
spirit of Sir Thomas Gresham, and was formally opened by 
Queen Elizabeth in 1571. The plan of the building was 
suggested by a bourse which had recently been erected at 
Antwerp, and exchanges of a similar character made their 
appearance in many commercial centres. The feature which 
differentiates this form of exchange from previous types is 
the fact that it involves the conscious application of the 
exchange idea in the erection of a building or the formal 
designation of a locality for the trading. 

This comparatively early type of the modern exchange 
had a wide scope in the character of its dealings, for mer- 
chants in a number of different commodities and securities, 
as well as shipowners, underwriters, and others, were all 



INTRODUCTION 9 

accommodated within its walls. There was speculation in 
the exchanges and market-places in the early days in the 
same way that there was speculation outside of them; but, 
in the types of exchanges just discussed, there was no 
special organization of speculation, nor was there that pro- 
vision for specialization in different departments which is 
the characteristic of modern development. Hence we find 
dealers in different kinds of commodities and securities 
leaving the Royal Exchange and establishing exchanges of 
their own. So thorough has been the hegira that, at the 
present time, the Royal Exchange has a deserted appear- 
ance, and is used for only one important kind of financial 
operations, — the dealing in foreign bills. 

When the different interests represented upon the Royal 
Exchange were separating, each provided in its new organ- 
ization for the particular necessities and conveniences 
which it needed; and, to accommodate certain classes of 
trade, the latest type of exchange made its appearance, 
namely, the modern speculative exchange or the one in 
which speculation largely predominates. Although the 
other kinds of market-places and exchanges exist in abund- 
ance at the present day, it is this latest development, the 
large, wealthy, important speculative exchange, which is 
ever in the public eye and is intimately associated with 
organized speculation. 

It was with the development of the commercial corpora- 
tion in its modern form and with the funding of national 
debts that the appearance of stock-brokers was first noted. 
In London they first met at the Royal Exchange with 
other business men as just described. They were assigned 
to a particular part of the building, and even in those early 
days of the seventeenth century, there were doubts as to 
the legitimacy of the business ; yet those who dealt in stocks 
were so numerous that they could not all be accommo- 
dated in the place assigned to them and they crowded the 
others. Finding themselves unwelcome, the stock-brokers 



10 VALUE OF ORGANIZED SPECULATION 

were among the first to withdraw and did business at differ- 
ent times in Change Alley, at coffee-houses, and at the 
Bank of England. 

The first distinctive organization took the form of a club 
among brokers who frequented a certain coffee-house, but 
the present organization of the London Stock Exchange 
may be said to date from 1773, in which year the exchange 
occupied a building of its own and adopted many of the 
features which now characterize it. 

In New York a little later than at London the ad- 
vantages of organization became apparent. The favorite 
meeting-place for stock-brokers in the early days was near 
a buttonwood tree which stood in front of 68 Wall Street; 
and in 1792 the brokers entered into an agreement in regard 
to the rates of commissions to be charged on stock transac- 
tions. It was not, however, till 1817 that a comprehensive 
organization of the New York Stock Exchange was effected. 

In every other country, as well as in the United States 
and England, speculation took the organized form as soon 
as the stage of evolution was reached at which trading in 
stocks and securities became of any considerable import- 
ance; and the history of the stock exchanges is the history 
of the modern financial system. In their early days they 
were occupied principally with the large increase of public 
debts and the wars that made them necessary. At the time 
of the Napoleonic wars, Nathan Mayer Rothschild was a 
prominent member of the London Stock Exchange. The 
anecdote is often told of how he witnessed the battle of 
Waterloo, and, after assuring himself that the Allies were 
victorious, secured a boatman who took him across the 
English Channel with such expedition that he arrived in 
London in advance of all others from the scene of war, and 
was able to avail himself of his knowledge of the issue of the 
battle in making advantageous trades upon the stock 
exchange. 

In this country the Civil War, with its far-reaching 



INTRODUCTION 11 

effects upon commerce and finance, was an important event 
in the history of the exchanges. The period of the war was 
a time of great expansion of organized speculation; and the 
speculative spirit engendered then has continued to the 
present day and is among the factors which have made this 
country the one in which speculation in stocks most widely 
prevails. 1 

The great work of Wall Street, however, has lain in the 
development of the producing power of the country; and at 
every stage, the speculative markets have occupied a pro- 
minent place. First the application of steam power to 
navigation resulted in a wonderful development of com- 
merce and the formation of numerous companies. The 
completion of the Erie Canal in 1825 further accentuated 
this development, and helped to increase the importance of 
New York as a commercial centre and a speculative market. 
The great growth of the banking business about the time 
mentioned and the trading in bank stocks which ensued was 
also a prominent feature of speculative dealings. 

When the building of railways was begun, Wall Street 
may be said to have entered into its most important work. 
Whether the activities of the speculators were for good or 
ill, the history of organized speculation during the greater 
part of the nineteenth century is most intimately associated 
with the development of the railway system. Later the 
organization of industry by combining widely separated 
interests has to some extent usurped the attention which 
had before been given to the stocks of railways; and the 
wonderful activity of Wall Street in the early part of the 
twentieth century has been closely associated with the 
trading in industrial securities. 

In European stock exchanges the financing of transporta- 
tion and industrial companies has not been so prominent at 
any time as in this country. Among the reasons for this 
difference is the fact that machine production and the large 
1 Cf. Bryce, The American Commonwealth, vol. n, chap. cvn. 



12 VALUE OF ORGANIZED SPECULATION 

corporations necessary to it are not so important as in 
America. Furthermore, railway lines do not take the place 
of ordinary highways to the extent that they do in this 
country; and in Europe railways are more frequently built 
and operated by governments. Also, the supply of capital 
has been so great that it sought an outlet in other lands, so 
that organized speculation in Europe has concerned itself 
more especially with securities of different kinds originat- 
ing in countries of backward development in out-of-the- 
way parts of the world, and the fluctuations in commerce 
and production in those countries have been quickly re- 
flected in the European stock exchanges. For instance, the 
Baring panic upon the London Stock Exchange in 1890 had 
its origin in unfortunate financial conditions in Argentina. 
The European exchanges, moreover, have continued to pay 
great attention to the funded debts of different national- 
ities. And the issues of war and peace, the rivalries of 
dynasties and the alternations in military and naval su- 
premacy of the different nations furnish the explanation 
for most of the important events in their history. 

There appears to have been an even less degree of realiza- 
tion of the possible future course of evolution in the early 
commodity exchanges than in the first type of the modern 
form of stock exchange. In those exchanges the develop- 
ment of which can be traced to early times, it is found that 
the idea of a speculative market did not exist at first, and 
that the facilities for organized speculation were added to 
other methods for furthering commerce in an already 
existing association. Even at the present day we find in 
some cities that the terms "Board of Trade," "Chamber of 
Commerce," and "Produce Exchange" are applied to asso- 
ciations which have no speculative market and which exist 
only for developing local industries and commerce; while 
in other cities these names are applied to associations in 
which the speculative element overshadows all others. 

The inconveniences to which our forefathers were sub- 



INTRODUCTION 13 

ject, because of the lack of organization in the process of 
fixing the prices of commodities, can scarcely be realized. 
At present any man may enter an exchange as a member 
or through a broker and become a market factor to the 
extent of the amount of the commodity which he is willing 
and able to carry. The condition that prevailed before ex- 
changes assumed their present prominence offers a pitiful 
contrast, when it is remembered that formerly the small 
dealer was at the mercy of the great magnate or merchant, 
with no system for giving dealers of his class any voice in 
determining the flow of commerce. How could any man 
know what price to place upon wheat, for example, at a 
time when famine prevailed in one province and a surfeit in 
an adjoining one, and when there were no systematic ar- 
rangements for utilizing the few facilities for communica- 
tion and transportation that were at hand? Prices in the 
early days could not at best have been other than the hap- 
hazard guesses of those who were not experts and who had 
every f acility for taking advantage of the weaker commer- 
cial units. There is some excuse, then, for the fiats and 
decrees of governments in early times in fixing prices, as the 
facilities were lacking for scientifically fixing them accord- 
ing to true commercial standards. 

The Chicago Board of Trade, which is the most im- 
portant exchange for trading in commodities, was incor- 
porated by the State of Illinois in 1859; but the present 
form of trading had not developed at that time. Indeed, it 
is said that the present system came into existence as an 
outgrowth of the method of contracting for supplies used 
by the Government during the Civil War. For instance, a 
party would enter into a contract with the Government to 
deliver a certain quantity of pork; and this contract would 
afterwards become the object of speculation. But whether 
the contracts of the Government played an important part 
or not, the obvious convenience of the system which was 
finally evolved would doubtless have caused its adoption 



14 VALUE OF ORGANIZED SPECULATION 

sooner or later in any case. The evolution was a rapid one, 
and, by the year 1869, a statement of rules for the system 
that now prevails upon the Chicago Board of Trade made 
its appearance. By 1870 the system had become fully 
established, not only in regard to those commodities 
traded in upon the Board, but in respect to others as well. 

The origin of the New York Produce Exchange can be 
traced to the Dutch occupation in colonial days. But the 
organizations which were the forerunners of the present 
one had different names and were different in most respects 
from the modern exchange. In general it may be said that 
the commodity exchanges have had much the same evolu- 
tion as the Chicago Board of Trade, except such of them as 
were formed after the present type had been developed. 
The New York Cotton Exchange, for instance, was not 
incorporated till 1871, and the New York Coffee Exchange 
not until 1885. 

The commodity exchanges having developed and as- 
sumed the modern form later than the stock exchanges, it 
is found that organized speculation in commodities has 
played a comparatively unimportant part in the history of 
commerce. This speculation is intimately connected with 
the development of the modern system of handling com- 
modities which became necessary as a complement to the 
introduction of transportation by rail and communication 
by telegraph. There are no striking events in this gradual 
evolution, however, and we must pass at once to a discus- 
sion of the features of organized speculation as it exists at 
present. 



CHAPTER I 

FEATURES OF ORGANIZED SPECULATION 

Referring to the definition given in the Introduction, it 
would appear that the activities of the speculator need not 
be essentially different from those of any other business 
man, and that the contracts he enters into must have the 
same general characteristics as other business contracts. 
The outward appearances, however, and the forms and 
methods used upon the exchanges seem so strange to the 
novice that it is necessary to describe them. In this de- 
scription the attempt will be made to keep ever before the 
reader the essential identity between exchange transac- 
tions and those made upon the outside, merely pointing 
out in each case the appearances which make them seem so 
different. 

The Commercial Exchange 

It is the united action of the officers and members of the 
exchange in establishing and enforcing rules and regula- 
tions which constitutes the organization of speculation. 
The contracts made upon the exchanges have reference 
to commodities and also to stocks, bonds, and other securi- 
ties. Most exchanges have specialties. One, for instance, 
may organize for dealing in grain and provisions, another in 
stocks and bonds, another in cotton, and so forth. 

In order that a commodity may be suitable for organized 
speculation, it must be capable of being preserved for a 
reasonable length of time, and of being graded or described 
with sufficient accuracy so that it can be referred to in 
speculative contracts. These requirements serve to illus- 
trate the peculiar nature of organized speculation, which is 



16 VALUE OF ORGANIZED SPECULATION 

principally concerned with the prices of a given kind or 
quality of commodity and not primarily with the price of a 
specific lot or package. It is true, there may be speculation 
in a specific article. A curio, a piece of real estate, or a 
horse, for instance, can be purchased for speculation; but it 
does not pay to organize the speculation in such commodi- 
ties. The specialization involved in organized speculation 
upon the commodity exchanges is so thoroughly centred in 
the question of prices of the different groups of commodi- 
ties that the speculators have little time in which to con- 
sider the points of value which belong distinctively to a 
particular article, or to concern themselves with the busi- 
ness details of preserving rapidly perishable commodities. 

Furthermore, it is necessary to have in store a consider- 
able quantity of the commodity speculated in, and the ware- 
house receipts used in making deliveries upon speculative 
contracts must call for commodities of a certain grade, the 
quality in each case being considered uniform throughout. 
The grading that is necessary, in order that a commodity 
can be speculated in, is often a matter of much difficulty; 
and, as will presently be shown, various expedients are 
adopted in order that the amount of commodities in store 
may be sufficient for the deliveries needed in speculative 
markets. Several important commodities, such as wheat 
and corn, are capable of being graded so as to fulfill the 
requirements; but the number of commodities that can be 
traded in according to the system that prevails upon the 
exchanges is limited. 

Organized speculation has its raison d'etre in fluctuations 
in prices. Therefore a commodity that by law or custom is 
not the subject of fluctuations would not be suitable for 
speculation. Such commodities could not be speculated in 
with profit, and speculators in them would not be per- 
forming a service. 

In all important exchanges the trading is restricted to 
certain members or other persons who are carefully desig- 



FEATURES OF ORGANIZED SPECULATION 17 

nated. To be a member and to have the right to trade or to 
have one's representative on the floor is considered a privi- 
lege of great value, and the profit arising therefrom is so 
great in some exchanges that a large price is often paid for 
membership. 

The exchange is a voluntary organization, although its 
methods of doing business are always more or less regu- 
lated by governments. The amount of this regulation 
varies in different countries; and it will readily be imagined 
that it is more important upon the Continent than in 
England or the United States. In the Paris Bourse, for 
example, those who constitute the Parquet, or original 
part of the exchange, resemble officers of the Government 
in their appointment and their status. But the facilities 
that are created by bringing together the different interests 
are most of them due to the enterprise of the exchange 
members in cooperating for their mutual good. 

The form of organization is quite different in the various 
exchanges. The New York Stock Exchange is not incor- 
porated. On the other hand, the Chicago Board of Trade 
and numerous other exchanges in this country have been 
duly incorporated by the several states in which they are 
respectively located. There are in most cases a president, a 
treasurer, a secretary, a board of directors or governors, 
and a number of committees, and these officials have charge 
of the several activities of the exchange. 

It is usual for an exchange to have a very wide sphere of 
action; and its officers and members enter into a number of 
matters not considered by the ordinary association or cor- 
poration. Particularly they supervise contracts between 
members, and declare the kind of contracts that may be 
made upon the exchange and the manner of enforcing 
them. Thus the New York Stock Exchange decides on the 
question of whether a given stock or security may be traded 
in; and when a particular issue of stocks or bonds is ac- 
cepted for trading, it is said to be "listed" upon that ex- 



18 VALUE OF ORGANIZED SPECULATION 

change. It decides also in regard to the manner in which 
certificates of its listed stocks must be engraved and issued, 
in order to prevent any possible forgery of certificates or 
over-issue, and in every way serves to facilitate and make 
safe the trading that takes place within its walls. 

In a commodity exchange the management decides on 
the kinds of grain or other commodities which shall be 
regular delivery on contracts, also on the place at which 
such commodities shall be stored and what kind of ware- 
house receipts shall be accepted in making deliveries. It 
considers freight rates, storage and switching charges, and 
it enters in many other respects into the minutiae of the 
contracts. 

An exchange frequently prescribes the charges or com- 
missions of its members and those within its control, and 
hears complaints from those who believe that they have 
been defrauded by its members. In some cases it goes so 
far as to punish members by fine, by suspension of the 
privileges of the exchange, and even by expulsion from the 
organization. 

The business of an exchange generally takes place in a 
large room or exchange hall, different parts of the room 
being used for different kinds of transactions according to 
the rules and customs established. In a grain exchange in 
this country the transactions for future delivery are usually 
made in a structure called a "pit," which is built upon the 
floor of the exchange hall. This pit consists of a number of 
steps or stairs arranged in such a way that the brokers can 
stand upon them facing one another in an approximate cir- 
cle. There may be several pits, each for a different com- 
modity, as wheat, corn, oats, or provisions. The commodi- 
ties sold for future delivery in the pit are graded, certain 
grades being good delivery according to the contracts 
entered into and the rules of the particular exchanges. 
Transactions by sample are made around tables which are 
placed about the room and on which are displayed samples 



FEATURES OF ORGANIZED SPECULATION 19 

of different cars or lots of grain or other commodities. It is 
not customary, however, to trade in stocks or securities in a 
pit. In the New York Stock Exchange posts are provided 
which designate the headquarters for trading in each of the 
several stocks and securities. 

The Method of doing Business 

The method of doing business by shouting and gesticu- 
lating is the outwardly noticeable feature of a commercial 
exchange. As the visitor first looks down from the gallery 
upon the mass of seemingly insane human beings upon the 
floor of the exchange, he is frequently heard to remark that 
he cannot see how they can ever understand one another or 
make anything out of it. Yet it is necessary, in affording a 
perfectly free market, that a trader have a right to make 
any proposition that he wishes regardless of the activities of 
others. Hence, in an exchange, etiquette is waived; and 
any one feels at liberty to interrupt any one else, and to 
shout his proposal at the top of his voice in the effort to 
drown out the others. 

Perhaps the easiest way of explaining this method of 
doing business is by comparing it with the manner in which 
an auction is conducted. 1 The difference lies in the fact 
that on an exchange there is not merely one auction being 
conducted at one time and place, but several are actually 
jumbled together in a kind of medley or composite auction, 
as it might be called. One trader may be auctioning off a 
parcel of wheat. But if he does not immediately accept any 
of the bids made, little attention is paid to him till he is 
willing to make some concession or till the situation 
changes ; for the others are themselves conducting auctions 
or bidding at them, all these bids and offers being inter- 
mixed according to the different proposals made by the 
parties. Some are seeking to buy, some are seeking to sell; 

1 Cf. Annals of the American Academy of Political and Social Science^ 
vol. xxxvin, p. 5. 



20 VALUE OF ORGANIZED SPECULATION 

and each is striving to make the trade that he wishes regard- 
less of the activities of others. The result of this method 
of doing business is all the confusion and shouting which 
those not to the manner born consider so extraordinary. 
Dignity and decorum are little heeded in this mass of strug- 
gling traders; and the etiquette usually observed among 
business men is sacrificed in order that the purpose of a 
commercial exchange may be accomplished. 

The facilities of a commercial exchange converge 
toward the exchange hall or room in which the trading is 
done, and every arrangement is made for communication 
with the outside. Telegrams are received directly in the 
exchange, and many of the brokers are connected with it by 
private wire or telephone. With few exceptions no one is 
allowed in the exchange hall except the members and 
telegraphers, messengers and other employees of the 
exchange and of its members. 

The hours for doing business are at the active business 
hours of the day when banks and other financial institu- 
tions are open and officials and others can be consulted. 
Thus the regular session of the Chicago Board of Trade 
takes place between 9.30 a.m., and 1.15 p.m., and that of the 
New York Stock Exchange is between 10 a.m. and 3 p.m., 
except that on Saturdays the closing is at 12 m. All trans- 
actions made at any other time than during the regular 
exchange hours or at any other place than in the exchange 
are called "curb" transactions, and are forbidden by its 
rules. The reason why they are given that name is because 
at times much irregular trading has been done by crowds 
or knots of brokers standing upon the curbstone in the 
street or upon the pavement. Hence to the exchange ha- 
bitue the word "curb" is associated with any trading that 
does not take place in the exchange hall during the time 
fixed for regular trading by the rules of the exchange. 

In the morning, as the hour for the opening of the session 
approaches, the members congregate in the exchange hall, 



FEATURES OF ORGANIZED SPECULATION 21 

but wait for the exact time fixed by the rules before any 
deals are made. When the time arrives, the signal is given 
and the trading begins. The opening is especially im- 
portant, as conditions are quite likely to have changed 
since the preceding session, resulting in even more uncer- 
tainty than usual in regard to the next quotations. Upon 
the Chicago Board of Trade the uncertainty and resulting 
confusion at the opening are so great that generally no one 
price can be fixed upon as the opening one in the case of 
wheat and other active commodities; but a range is quoted 
between different transactions simultaneously made. Such 
a range is sometimes quoted as the opening of especially 
active stocks upon the New York Stock Exchange. 

The opening having been made, the market usually 
becomes quiet, except that there are irregular fits and starts 
of activity which may occur at any time, and any of which 
may develop into a boom or panic. But the mid-session is 
usually more quiet than the opening or close. As the close 
approaches, each broker and trader is careful to be in posi- 
tion to note all circumstances and exercise his influence to 
make the close what he wishes it; for the closing quotation 
is the price to be considered by all interests till the opening 
next day. Until the next session there are no dealings 
except the prohibited curb transactions. 

The Orders 

The speculator or investor, having arrived at a conclu- 
sion in regard to the market, gives his order to a broker, 
who either acts directly or through his representative in 
the exchange. The system of communication is so excel- 
lent, and the method of doing business is so facilitated, 
that the order can be executed in a remarkably short space 
of time. For instance, suppose the order be to buy 5000 
bushels of contract wheat for delivery at such time during 
the month of May next following as the seller may deem 
expedient, at 97|c per bushel. In making the bid, the 



22 VALUE OF ORGANIZED SPECULATION 

broker simply shouts, "Buy five May at three eighths" — 
all the rest being understood. If another broker wishes to 
accept the bid, he simply says, "Sold"; or he makes a ges- 
ture or nod signifying assent, and the deal is made. This 
quickness in executing orders by abbreviated speech and 
the use of the telephone and telegraph is necessary in order 
that a trader may not be anticipated in a favorable trans- 
action by some one more alert. Things are done quickly 
upon the speculative exchanges. 

An order given for execution at the market must be exe- 
cuted at the best price obtainable at the time the order is 
received. In case the broker has such an order, he makes 
a bid which he thinks the best that would have any chance 
of acceptance; but if the proposal be not accepted, he makes 
a less advantageous one or accepts some offer from others. 
Often the market will remain for several minutes at a cer- 
tain point at which considerable trading takes place. In 
this case the broker's duty is simplified, for he can usually 
find some one who will make a trade at the going price. But 
at other times the market is what is called "sellers" — 
that is, there are sellers at a certain price, but no bidders 
except at a lower price. Or the opposite may be true; and 
there may be buyers at a certain figure, but no sellers. 
These conditions of the market, which, by the way, are the 
usual ones, call for care on the part of a broker in executing 
orders; but he has no discretion, and must deal on the best 
terms he can if the order be for execution at the market. 

Other orders are resting or waiting orders on which a 
limit is fixed for execution. For instance, a broker may 
receive an order to buy 100 shares of a certain stock at 95 
or better. In that case he waits till the trading nears 95, and 
then bids that figure till he executes the order or until the 
market moves so far away that bidding would be futile. 

"Stop loss" orders constitute another form of orders for 
the execution of which the continuous market of the ex- 
changes gives every facility. A stop order is different in 



FEATURES OF ORGANIZED SPECULATION 23 

one important respect from the example of a waiting order 
just given. It is intended to stop losses at a point beyond 
which the trader is not willing to run the risk of a further 
adverse movement. Thus, let us suppose that a trader be 
the owner of a certain stock, and that he prefers to have his 
stock closed out at 87 rather than run the risk of a decline 
below that figure. Accordingly he instructs his broker to 
stop his loss by selling his stock when 87 is reached. The 
broker may not be able to sell the stock at exactly the 
figure designated; because, to continue with the illustration 
just given, the market may pass 87 so rapidly that nothing 
can be done until say 86f is reached. However, in the con- 
tinuous market afforded by the exchanges such an order 
can usually be executed at the limit fixed. Only the merest 
approach to stop orders can be found in business outside the 
speculative exchanges, as a continuous market is necessary 
to execute them. 

Other forms of resting or waiting orders than those men- 
tioned are orders for execution at the opening or close, 
or, for instance, at 10 o'clock or at 12 o'clock. A trader 
may fix any limit that he wishes for the execution of his 
order. 

Somewhat similar to stop orders are hedging orders; for a 
hedge is intended as a protection against loss. But a 
hedger does not necessarily wait till a deal has gone against 
him before putting on the hedge. Strictly speaking, when a 
speculator or investor hedges, he enters into a deal of a dif- 
ferent nature from the original one in the hope that, in case 
the original deal shows a loss, the hedge may show a profit. 
One stock, for instance, may be bought as a hedge upon 
a deal in another stock; or a commodity may be bought or 
sold as a hedge. There are thousands of schemes for hedg- 
ing, some of which are useful and some of which are falla- 
cious; and the orders that result from them affect the 
supply and demand for commodities and securities upon 
the exchanges. Thus hedging orders on grain powerfully 



U VALUE OF ORGANIZED SPECULATION 

affect the Chicago market, as Chicago has the broadest 
grain market and consequently the best opportunities to 
place hedges. At the time of marketing grain, for instance, 
a great deal of selling is done in Chicago as a hedge on pur- 
chases made elsewhere; and hence the supply is affected 
and an important influence upon prices exercised. 

Fraudulent orders are also to be considered. A trader 
may give out orders to one broker to buy a stock and orders 
to another broker to sell the same stock under such condi- 
tions that both the buying and selling orders are likely to 
be executed at the same time. The principal in the case 
supposed may as a result be selling to himself through dif- 
ferent brokers; and the orders that he gives to bring about 
this result are called "matched orders." A sale in which a 
trader sells to himself through matched orders given for 
manipulative purposes is called a "wash sale," and such a 
transaction is of course a fictitious one. 

The purpose of giving matched orders and of making 
wash sales is to make quotations which a manipulator may 
desire, and so to move a market either up or down with a 
minimum of loss to the manipulator. For instance, suppose 
that Union Pacific be selling at 180 and the order be given 
to sell 100 shares of the stock at 179 and to offer it down to 
that figure, while another broker is given an order to buy 
100 shares at 179. The broker who has the buying order 
would bid 179. But no one under the conditions supposed is 
likely to accept the bid except the broker who has the sell- 
ing order; and, when he accepts it, the quotation is made 
and goes out at 179, and the stock is said to have been 
"marked down" to that figure. Since the manipulator 
both buys and sells at 179, it will readily be seen that he 
suffers no loss except such commissions as he may pay. 

It appears to have been the intention of the founders of 
the New York Stock Exchange and of other exchanges that 
the members were to act only as brokers for others. But at 
the present time there are many members of the exchanges 



FEATURES OF ORGANIZED SPECULATION 25 

who trade principally for themselves. Upon the New York 
Stock Exchange these are called " room-traders.' ' 

In the London Stock Exchange a system prevails 
whereby some members are classified as dealers or jobbers 
and others as brokers. Upon that exchange the brokers do 
not execute their orders directly with other brokers or 
traders as at New York. But the broker who has received 
an order to buy or sell a certain stock seeks out one of the 
jobbers or dealers just mentioned and ascertains from him 
the prices at which he will trade. The jobber usually names 
two figures — one at which he will sell and a certain lower 
price at which he will buy, either one of which proposals the 
broker is at liberty to accept according to the nature of his 
order. 

In all forms of exchange trading, the very fact that many 
of the trades are executed by persons other than those who 
run the risk of them makes the question of brokerage or 
agency important. If all deals were made personally by the 
traders who originate them, the business of the exchanges 
would be to an extent simplified. It is necessary, therefore, 
to become acquainted with the system of putting in orders 
and of executing them in order to understand many of the 
vagaries of the market. 

Distributing Quotations and News 

When a transaction is made, the quotation is at once sent 
out by a remarkably developed system. There are those in 
attendance who understand the abbreviated forms of 
speech and the methods used in this kind of trading, and 
hence are able to give the quotations to the telegraphers as 
fast as they are made. The brokers and traders also help 
in informing the telegraphers of any deals that may have 
escaped attention, thus making the quotations complete. 
In the broker's office the quotations are received by a 
telegrapher, who places them upon a blackboard where all 
can see them. 



26 VALUE OF ORGANIZED SPECULATION 

There is also another service whereby the quotations are 
printed by a little mechanism called a "ticker" upon a long 
strip of paper called the "tape." This apparatus dispenses 
with the telegrapher at the receiving end, and is commonly 
used, not only by brokers, but by hotels, restaurants, and 
clubs whose members wish to be informed of changes in 
values. The wide extent to which such quotations are thus 
disseminated is remarkable. 

Besides the quotation ticker above described, there is the 
news or gossip ticker which prints the news in regard to 
speculation and the course of trade. The collection and dis- 
tribution of news, it may be mentioned, is one of the most 
important functions of the speculative exchanges, and the 
organization of speculation gives encouragement to those 
who collect and disseminate it. 

The agency, however, which is the most important in dis- 
tributing the quotations and news bearing upon the market 
is the periodical press. All periodicals except those devoted 
to the interests of some specialty of a totally dissimilar 
character give much space to organized markets. Elabor- 
ate reports covering the fluctuations and news from the 
exchanges are prominent, and editors are specially em- 
ployed to write articles giving opinions of market move- 
ments and making predictions in regard to future fluctua- 
tions. 

The organization of speculation shows itself characteris- 
tically in the development of the facilities for communica- 
tion just mentioned. No other business is organized in this 
manner. A trader upon an exchange may travel through- 
out his country and everywhere receive intelligence in 
regard to his business. He has but to look at the ticker 
which he finds so widely distributed or to purchase a news- 
paper in order to find news, quotations, and opinions. The 
business done upon the exchanges is the best advertised of 
any, and the publicity which exists in regard to it assists 
greatly in making a free market. 



FEATURES OF ORGANIZED SPECULATION 27 

Organized speculation thus marks the culmination of the 
inventions for the gathering and disseminating of intelli- 
gence in regard to commerce. It is different from any of the 
others, yet it utilizes them all. The railroad, the telegraph, 
the telephone, the mail service, and other modern inven- 
tions and institutions are the constituent units or members 
which are finally united into one system with organized 
speculation as the principal factor. 

The quotations and intelligence of a particular exchange 
are not only communicated directly to the brokers and 
traders who deal in it, but to other exchanges as well. The 
grades of the different commodities traded in vary with the 
different exchanges, and of course the freight or carriage 
must be allowed for in calculating the values of commodi- 
ties at the respective locations. Notwithstanding these and 
other conditions which must be taken into consideration, 
the markets sympathize with one another, and in most cases 
move in harmony. This is accomplished through the excel- 
lent system of distributing quotations, and the trading 
which grows out of it. Those who thus keep the different 
markets in line are called arbitragers. Their function can 
best be illustrated by a practical example. 

Let us suppose that upon the Chicago Board of Trade a 
cablegram is received announcing that the market for 
wheat at Liverpool has declined. Unless the arbitrager has 
reason to believe that the cause of this decline is a local 
matter peculiar to the Liverpool market, he feels that relat- 
ive values in the two commercial centres should remain 
the same; and he reasons that it is probable that, through 
diminution of shipments from this country to the United 
Kingdom or from like causes, the two markets will ulti- 
mately be brought into line. But it is the business of the 
speculator to look ahead, and he sees here a chance to make 
money by trading on the probability that prices upon the 
two markets will resume their former proportion. Thus the 
arbitrager, acting through his own selfish interest, yet with 



28 VALUE OF ORGANIZED SPECULATION 

as useful a commercial purpose as any, proceeds to buy 
wheat in the Liverpool market and sell it in the Chicago 
market. But the buying at Liverpool increases the demand 
at that place and so has a tendency to put that market up; 
while the selling at Chicago increases the supply which 
there presses upon the market, and of course tends to de- 
press the price at that place. The buying and selling of the 
arbitragers and speculators in the manner just described 
are so effective that proportionate prices between two mar- 
kets, in case they get out of line, are generally quickly 
restored. Hence the speculator in these arbitrage transac- 
tions anticipates changes in value and buys and sells in 
order to take advantage of them; only in this instance it is 
not changes in specific values that the speculator is fore- 
casting, but changes in relative values between two 
markets. 1 

In arbitrage dealings the smallest fractions are consid- 
ered, and the time necessary to complete such transactions 
is so reduced that two markets may move in almost exact 
harmony. If they appear to get out of line for any appre- 
ciable length of time, all traders look to local changes in 
supply and demand as the cause, and come to consider the 
new proportion established as the proper one. In arbitrage 
upon grain and other commodities the varying freight 
rates, the local conditions, and technical position of the 
market must be kept in mind. As regards stocks and se- 
curities, however, these complications are not so important; 
hence, as a result of arbitrage, stocks that have a wide 
market should have, and do have, substantially the same 
value the world over; for the cost of transporting either 
stocks or money or of dealing in exchange is inconsiderable 
when any but the smallest transactions are undertaken. 

To sum up : the system of distributing news and quota- 

1 For the view that arbitrage is not speculation but trade, see Emery, 
Speculation upon the Produce and Stock Exchanges of the United States, 
p. 138. 



FEATURES OF ORGANIZED SPECULATION 29 

tions brings together upon an exchange the transactions of 
widely separated traders, and the rapid communication 
between the different exchanges gives special prominence to 
modern methods, so that all exchanges move substantially 
as one in the making of prices. Commerce is thus unified, 
unfortunate differences between localities are ironed out, 
facilities for information and trade are thrown open to all, 
and the possible unfair advantages which one community 
might secure over another are to a great extent curtailed. 

Describing the Market 

Organized speculation has its peculiar language which is 
employed in describing the market; but the technical terms 
are not usually from Latin or any other classical tongue. 
On the contrary, many of them are derived from the lan- 
guage of the street or from slang. Some of these terms have 
been already defined, but it is necessary to give the mean- 
ing of others in order that subsequent explanations may be 
understood. 

The familiar terms "bull " and "bear" are explained and 
easily remembered by referring to the habits of the animals 
from which the terms are derived. A bull is always seeking 
to toss things upward with his horns. Hence those who 
seek a rise in the market are called bulls. But the habits 
and tendencies of a bear are quite different. He is always 
pulling things downward with his claws. Hence it is espe- 
cially appropriate that those who seek to pull down prices 
are called bears. 

The words "bull" and "bear" are not used in their com- 
mercial sense in outside business, but there are bulls and 
bears everywhere in trade. The business man who needs a 
horse, for instance, is extremely bearish in his talk. He is a 
bear on horseflesh because he is seeking to purchase, and his 
interest lies in depressing the price. Hence he depreciates 
his neighbor's property in much the same way that the bear 
on the speculative exchange seeks to depress values. But 



30 VALUE OF ORGANIZED SPECULATION 

when a man has a horse which he bought for speculative or 
other purposes, he is likely to become a pronounced bull; 
and property that he may have recently been depreciating 
has now become of great value and is highly extolled. 
Human nature is the same upon the exchanges, but the 
organization and bringing together of large numbers of 
traders make the characteristics of bull and bear more 
prominent than in outside trade. Not only are the words 
used in the sense above described, but adjectives are 
formed from them. Thus, when a market shows a tendency 
to go up, it is said to be "bullish"; but if the tendency be 
downward, it is said to be "bearish." 

An upward movement of a market accompanied by great 
excitement and speculative enthusiasm is called a "boom." 
A panic, on the contrary, occurs when speculators lose con- 
fidence and numbers of them seek to sell at the same time, 
causing demoralization and a great, fall in prices. When a 
market fluctuates within narrow limits, it is said to be 
"choppy." If a market does not seem to have any well- 
defined tendency, but moves with eccentric fits and starts, 
— some securities or commodities advancing, and others 
declining, — it is said to look "spotty" or "spotted." 
When a market shows a tendency to go up, it is said to look 
"strong"; but if it seems inclined to fall, it is said to look 
"weak." A "bulge" is a sudden bull movement; but a 
"slump" or "break" is synonymous with a decline. 

In describing the distance that a market moves, the 
word "point" is often used. In securities it means one dol- 
lar per share of stock, or one per cent on the par value of a 
stock or bond; in grain one cent per bushel is meant; while 
in cotton, a point is one hundredth of a cent. The word 
"point" is also used as synonymous with "tip," or advice 
to buy or sell a stock or commodity. 

A "syndicate" is a group of capitalists who unite their 
resources to accomplish some financial or business object. 
A "clique" or "pool" is much the same as a syndicate, 



FEATURES OF ORGANIZED SPECULATION 31 

except that in the speculative markets the terms are usu- 
ally used in describing a group of speculators who are seek- 
ing by uniting their interests to manipulate the market. 

Margin Trading 

The practice of leaving a deposit of money to bind a bar- 
gain, and as security for faithful performance of a contract, 
is so common in all kinds of business as scarcely to need 
comment. In real estate transactions, the value which a 
property has over and above any mortgage is called an 
"equity." When chattels or other property are bought, 
partly for cash, partly on time, the cash payment is called 
in book language, "earnest money"; or, in common busi- 
ness colloquialism, it is said that the buyer has made a cer- 
tain "payment down." The balance in such a case may be 
paid in installments, or the seller may retain his lien upon 
the property indefinitely, according to the terms of the 
particular contract entered into. 

In the parlance of the exchanges, however, when a 
trader buys partly for cash, partly on time, the amount of 
money which he puts into the deal is called a "margin." 
The name is all that differentiates it from a similar deposit 
in numerous forms of transactions entered into, in all kinds 
of outside business every day. There is no difference in 
principle between margin trading and those other forms of 
business transactions, but, upon the exchanges, the margin 
deals are much more frequent, and the margins necessary 
are much smaller than are required elsewhere. A broker in 
stocks, for instance, will take trades for a client for ten per 
cent margin or even less. After purchasing a stock on the 
small margin mentioned, he will hypothecate it; but the 
bank, in making the loan, will lend him only about eighty 
per cent of its value. Thus the margin which the bank 
requires is, say twenty per cent, or roughly speaking 
double, even more than double in mai^ cases, - what the 
broker gets. The brokers and commission men are thus 



32 VALUE OF ORGANIZED SPECULATION 

seen to have, a system of making transactions with the 
smallest of margins or security. This is one of the import- 
ant features of dealing upon the exchanges which will be 
referred to later; for, though the principle of margin trading 
is seen everywhere in business, the size of the margin has 
the most far-reaching effects. 

Future Delivery 

In general business, when a purchase is made, delivery 
may be immediate or it may be put off until a future time. 
A contract in which the delivery is deferred may be under- 
taken from a variety of reasons. Thus the seller may not 
have the goods ready for delivery at the time the contract is 
entered into, or they may not even be in existence at that 
time, or the buyer may not be ready to receive them. For 
instance, a builder agrees to deliver a building to a party 
within a certain specified time. At the date of making the 
contract, he may have none of the materials, machinery, or 
labor at hand; but, after the contract is made, he executes 
it by buying the necessary supplies and hiring the necessary 
labor. There are many other kinds of business like that of 
the builder, in which it is customary to make the goods 
after they are sold. Referring to merchandising, there are 
many kinds of merchants who make a practice of selling 
goods before they are purchased from the wholesaler. 

Upon the speculative exchanges we have practices some- 
what similar in their nature. There are the cash or "spot" 
transactions, in which a commodity or security is delivered 
soon after the contract is made; and we have "future" 
transactions, in which delivery may be deferred to a more 
distant period. The time that may elapse before delivery 
is different in different exchanges, and there is a latitude in 
the particular terms that may be agreed upon by the par- 
ties. In the New York Stock Exchange, in the case of a 
regular transaction there is delivery upon the next day 
after a trade is made. On the European bourses an account 



FEATURES OF ORGANIZED SPECULATION 33 

system prevails among brokers, a period of time, as a fort- 
nightly period, being fixed for settlement, in something the 
same manner (waiving particular customs and technicali- 
ties) as the first of the month is often regarded as a day of 
settlement in other kinds of business in some parts of this 
country. 

In the dealings in commodities upon the speculative ex- 
changes, while the delivery is no different in principle from 
any other form of future delivery, it is usually for a period 
of time computed in a different manner. Instead of buying 
grain to be paid for, say on the first of the month or on 
sixty days' time, the speculator usually buys what is tech- 
nically known as a "future." Thus the speculator buys 
wheat to be delivered some time in September at the 
seller's option. Yet such a contract is no different in its 
essence from any contract for delivery at a future time in any 
business, except that, instead of delivery being made on or 
before a certain specified day, it is to be within certain 
hours on any business day in the specified month. 

An "option" is a contract in which the buyer or seller 
has some choice as to whether he shall perform the contract 
or as to the terms under which it may be performed. The 
most common use of the word is as a synonym for the term 
future. Thus, when it is said that a trader has sold the May 
future or option, the meaning intended is that he has sold a 
certain commodity, as 5000 bushels of wheat, for delivery 
in May. The option lies with the seller as to the time in 
May at which he shall deliver. It is not allowable to de- 
liver before the month of May has arrived, but he must 
deliver at some time during that month on or before the 
last business day. 

The form of option just mentioned is not used in stock 
transactions, but it is allowable, for example, upon the 
New York Stock Exchange to trade in buyer's and seller's 
options to deliver stock for not less than four nor more 
than sixty days. To take an illustration, let us suppose 



34 VALUE OF ORGANIZED SPECULATION 

that 100 shares of a certain stock be sold at 107 "seller 30." 
Such an expression means a contract whereby the seller 
must deliver the stock within thirty days of the time that 
the contract was made, and that he may deliver it on any 
day within the thirty days at his option. The buyer's 
option is the same as that of the seller's option just 
mentioned, except that the buyer may choose the time 
within the specified period at which the contract is to be 
executed. 

Short Selling 

" Short selling " occurs whenever a party sells something 
for future delivery which he does not own at the time when 
the sale is made. Here, as elsewhere, it is principally the 
name which differentiates the proceeding which takes place 
upon the exchange from other business. Thus, if we apply 
the term "short seller " to the builder who sells the building 
before it is built, it would be difficult to point out any essen- 
tial difference between such a transaction and a short sale 
on an exchange. But in organized speculation, short sales 
are almost as common as purchases for long account. A 
perfect system has been developed so that the bear may 
sell before he buys just as easily as the bull may buy before 
he sells. In the pit no one inquires whether a broker who is 
offering to sell wheat owns it at the time when the sale is 
made. If a trader wishes to buy at the price mentioned, 
he accepts the offer; the trade is entered on the cards of 
the parties concerned, and passes on to the clerical force 
to be settled by actual delivery or the payment of differ- 
ences, according to the wishes of the principals in the 
trade. 

Such is the facility with which short sales are made that 
the term itself is hardly used among traders and brokers. 
The client simply tells his broker to sell, if he wishes a short 
deal made, or to buy, if a bull deal is desired, and a trader, 
who is buying and selling all day, may not know exactly 



FEATURES OF ORGANIZED SPECULATION 35 

how his trades are to be made up ; for, when he receives his 
statement, he finds one column for purchases and another 
for sales, with the dates of course mentioned, but with no 
memoranda as to whether the deals were originally made 
for long or for short account. 

Yet the very facility with which the short sales are made 
upon the exchanges puts the short seller in the speculative 
markets in a very hazardous position; for it is obvious that, 
where large contracts to supply a certain stock or com- 
modity are made, there might come a time when these 
numerous engagements could be executed only with dif- 
ficulty. When the supply of the actual commodity is limited 
and when the anxious shorts are bidding for it, in order to 
close their contracts, we have the condition of the market 
which is called a "corner." The market for any commodity 
outside the exchanges can be cornered. But in outside busi- 
ness there is not this unwieldy mass of short sellers to force 
up prices with a terrible rush. Those who sell buildings in 
advance, for example, know that there is little likelihood 
of the market for building materials being cornered. The 
price may be raised before the builder is ready to buy, but 
he has little reason to expect an oversold market; and any 
combination that might appear would concern itself rather 
with getting permanent control of the market than in 
attempting to squeeze any one by sensational or violent 
fluctuations. All of these questions, however, will be 
referred to later. 

The fact that the short seller is so prominent upon a 
speculative exchange results in an abbreviated nomencla- 
ture to designate him and his opposite. Thus a trader who 
has made a short sale is called "a short"; and one who has 
purchased expecting a rise is called " a long." When a short 
seller wishes to close his contract, he makes a purchase 
which is called "covering his short." When, on the con- 
trary, a long purchaser closes his contract by selling, it 
is said that he "liquidates" or "unloads"; and when a 



36 VALUE OF ORGANIZED SPECULATION 

clique or syndicate finally disposes of a mass of securities 
that they have been marketing, it is said that the securities 
have been "distributed" or "digested." 

Borrowing 

Let us suppose that a customer comes to a hardware 
merchant and asks for a particular kind of hammer, and the 
merchant finds that he does not have the exact article 
wanted in stock. When such a case arises, the merchant 
frequently offers to send to the wholesaler, or perhaps he 
will say he might "pick it up around town." The merchant 
then goes to one of his fellow dealers, tells him he has an 
order for such a hammer, and asks if he can borrow one; 
promising to return a precisely similar hammer at a later 
time. The proposal being assented to, the merchant receives 
the hammer and delivers it to his customer in the regular 
course of business. He then orders a stock of the hammers 
from the wholesaler; and when they arrive, he hands one of 
them to the merchant from whom one was borrowed and 
thus pays the loan. 

There are different methods by which a merchant who 
has sold an article that he does not own may settle the 
transaction, but in the illustration above given, one 
method is called to mind by which such a transaction is 
sometimes adjusted. Upon the New York Stock Exchange, 
however, this method is erected into a system; and, if a 
trader sells a stock for regular delivery that he does not at 
the time own, his brokers may borrow the stock for him, 
using the same to make delivery. The manner in which 
this process is conducted upon the New York Stock 
Exchange is as follows : — 

After exchange hours the brokers assemble for the bor- 
rowing and lending of stocks, and those who thus congre- 
gate are called the "loan crowd." When a trader has sold a 
stock that he does not own, his broker goes to the loan 
crowd and borrows the stock according to the rules and 



FEATURES OF ORGANIZED SPECULATION 37 

customs of the exchange. When the loan is made, he pays 
the lender the market value of the stock, which remains on 
deposit till the loan is canceled. During the life of the loan 
the deposit may be changed to correspond to the fluctuat- 
ing value of the stock. The terms upon which such a loan is 
made are usually that the lender of the stock must pay 
interest upon the money which he receives as security. The 
interest which is paid in such a case is called the "loaning 
rate." It varies according to the demand and supply of the 
stock for lending purposes and according to general finan- 
cial conditions. In some cases under the law of supply and 
demand no interest or loaning rate is charged, in which case 
the stock is said to be lent "flat." In other cases the de- 
mand for the stock may be so great that the borrower of it 
may not only be obliged to forego interest upon the money 
that he has deposited, but he may be required to pay a 
premium for the use of the stock. 

Substitution 

In various kinds of business it is quite common, when the 
dealer receives an order, to turn it over to the manufac- 
turer with instructions to ship direct to the consumer. In 
some lines of trade this practice is the usual one; while in 
others it is only occasionally availed of. For instance, let us 
suppose that a furniture dealer at Minneapolis sells a 
dozen chairs to a customer at Duluth, but the chairs are 
sold, let us say, from a photograph or blueprint, as the 
dealer does not carry them in stock. Now what does he do 
in this case? He orders the goods from the manufacturer 
in, say Grand Rapids, sending of course shipping instruc- 
tions. He might have them forwarded directly to Minne- 
apolis, and, after he received them, he could reship them to 
his customer at Duluth. But, when we remember that 
every time goods are handled, the expense is increased pro- 
portionately, we see the advantage of a more direct way. 
The method to be pursued, of course, is for the dealer to 



33 VALUE OF ORGANIZED SPECULATION 

order the goods sent direct to his customer at Duluth. 
Thus in such a case — and the instance is by no means an 
uncommon one — a merchant sells something that he does 
not own, which is never delivered to him and which he 
could not identify even if he should ever see it; and the 
manufacturer finds himself shipping goods to a party with 
whom he has never made a contract, and even, in some 
cases, collecting money and adjusting complaints with such 
a substituted party. 

There are various forms which similar transactions may 
take. For instance, the customer might enter the show 
rooms of the manufacturer and ask to see his samples. But 
he would be told that the manufacturer did not sell to 
any except dealers, whereupon the customer might say he 
would buy from his local dealer. The manufacturer would 
then quote the retail price on the goods ; and, on delivering 
the same and collecting his bill, would remit the difference 
between the wholesale price and the retail price to the 
designated dealer. 

Every business has its peculiar customs and methods of 
adjusting trades, and any one transaction may be a little 
different from others; but the broad principles governing 
them are the same. The evolution is always towards the 
saving of expense in making transactions, and especially in 
delivering the goods. The above illustrations only show 
some cases where parties are substituted in making ship- 
ments and collections, and indicate how little concern there 
is in general trade about the parties to whom delivery is 
made or whether settlement is secured by the payment of 
differences. The method which yields most readily to the 
desire for quickness and saving of labor is the one most 
favored. The customs of the speculative exchanges in the 
matter of substitutions and payment of differences do not 
vary from outside forms of trading any more than outside 
forms vary among themselves. These modern methods are 
quite common in organized speculation; and, as will be 



FEATURES OF ORGANIZED SPECULATION 39 

shown presently, a system of book-keeping is especially 
devised to further them. 

Cancellation of Trades 

The cancellation of trades as practiced upon our com- 
modity exchanges is one of the methods whereby trading is 
facilitated and much of the clerical labor of settling is 
avoided. The system can be best understood after we have 
considered an example taken from a form of speculation 
which exists outside of the exchanges. 

If the seller of a piece of land changes his mind in regard 
to the value of the land to him after the deal has been 
closed, and if the buyer also changes his mind, the land 
may be bought back, leaving both seller and buyer in the 
same position as before entering into the first deal. If this 
second sale occur before the transfer is made on the first, 
the ceremony of passing the title would be an empty one. 
It would be considered a superfluity for the original seller 
to make a deed to his grantee when it is known that the land 
must immediately be conveyed back to him. The best 
method, of course, would be to waive all ceremony as to 
conveying the land and make settlement by payment of the 
difference in price, if the second sale be at a different figure 
from the original one. 

Transactions of this sort, which sometimes occur in an 
active market for real estate, are frequent among traders 
upon the exchanges. For instance, A might sell wheat to B, 
and B might resell it to A. If neither one of the parties had 
the wheat when the time for delivery arrived, they might 
find themselves at a loss as to which would be required to 
make delivery first. A might depend upon B to deliver to 
him in order that he might use the wheat in making his own 
delivery; while B might insist that A make delivery first. 1 
Either of the parties would have an equal right to bring 
action at law against the other for the delivery of the 
1 Cf. Hill, Gold Bricks of Speculation, p. 379. 



40 VALUE OF ORGANIZED SPECULATION 

wheat; and neither one of the parties would be any better 
able to defend such an action than the other. The obvious 
expedient would be for the parties to settle the transaction 
by merely paying the difference, if any, between the prices 
at which the two transactions were made, as in the case of 
the real estate deal mentioned above. 

Ringing Out 

The principle illustrated above, whereby trades are can- 
celed in case the parties place themselves in their original 
position by a sale back to the original seller, is customarily 
carried much further upon the exchanges than elsewhere. 
For instance, Broker A may sell to Broker B a parcel of 
wheat. Broker B may make a similar sale to C; and C may 
sell again to A. It is seen in this instance that a complete 
ring is formed; and there is so much buying and selling back 
and forth upon the exchanges that much of the business 
will resolve itself into rings. Many of the rings are much 
larger than the simple one suggested above. An example of 
such a large ring might be the following: — 

A sells 5000 May wheat to B 

B C 

C D 

D E 

E F 

F G 

G A 

It will be noticed in this large ring, as well as in the 
smaller one, that the purchaser in the last transaction is the 
seller in the first; so that deliveries of wheat are no more 
necessary than in the previous illustration. It is the busi- 
ness of the clerical force of a board of trade house to watch 
the various future transactions and settle them by the pay- 
ment of differences in case a ring be formed, such settle- 
ments being similar in principle to the manner in which any 



FEATURES OF ORGANIZED SPECULATION 41 

conveyancer would adjust a real estate transaction of like 
nature. 

In cases of a ring settlement, the manner of making it is 
more complicated than where a purchaser sells back pro- 
perty directly to the one who sold it to him. Let us suppose 
a case in which a lot of 5000 bushels of wheat is transferred 
between the following parties at the prices mentioned : — 

A sells to B at 81c 
B C 79 

C D 82 

D E 78 

E A 83 

One way of settling the above ring would be for B to pay 
to A, $4050, the value of 5000 bushels at 81c, and for C to 
pay B his purchase price, or $3950, and so on. But it is not 
customary for business men to pay large sums of money to 
one another when the art of book-keeping offers an easier 
way. As a preliminary to understanding the method by 
which transactions are settled upon an exchange without 
the transfer of large sums of money and commodities, the 
following statement of profits and losses per bushel in the 
last supposed ring may be considered : — 

Profit Loss 

2c 





Purchase 


Selling 


Party 


price 


price 


A 


83c 


81c 


B 


81 


79 


C 


79 


82 


D 


82 


78 


E 


78 
Total 


83 



2 



3c 



8c 8c 

It will be observed that the total losses and profits in this 
ring are exactly equal, as was to be expected, and it is only 
necessary for those who have lost to pay the differences to 
those who have made profits in order that the ring may be 
settled. For convenience, however, the book-keepers have 
a method whereby the profits and losses as above stated are 



42 VALUE OF ORGANIZED SPECULATION 

computed to a certain settling price, which price is fixed at 
such a figure as to make the payments of money as small 
as possible. The settling price is used merely as a conven- 
ience, in the same way that any other accounting device 
available in any particular business is adopted to save labor 
in book-keeping. In the description of the ring settlements 
as well as of other exchange practices, it is not meant to 
imply that all exchanges use precisely the same methods, 
but the accounting principles availed of in each case are the 
same. 

It should be stated and emphasized at this point that no 
one may make a trade upon an exchange and at the same 
time declare that he does not intend to deliver the grain or 
other commodity, or to have the commodity delivered to 
him. The method of settlement by a ring and settling price 
is intended solely for cases in which a trader has concluded 
to get out of a deal before the time for delivery arrives. If 
he wishes to make the actual delivery or to have the 
delivery made to him, he is accommodated in every 
case. 

Another important example may be brought to mind of 
accounting methods similar in their nature to the ringing- 
out process. The numerous forms of acceptances, bills of 
exchange, and other representatives of money are made to 
do the duty of material gold and to economize, to an enor- 
mous degree, the use of that metal. By a remarkable sys- 
tem of the payment of differences, the adjustments of both 
domestic and international trade are accurately made with 
astonishingly small shipments of actual gold. If Paris owes 
New York, and New York owes London, and London owes 
Paris, only gold enough is shipped to settle the differences 
in the transactions. A ring has been formed just as truly as 
one that is made upon the board of trade; and commerce, 
by its refined system of barter, allows paper representa- 
tives and promises to take the place of the material sub- 
stances in terms of which the transactions are made. 



FEATURES OF ORGANIZED SPECULATION 43 

Book Accounts 

Among the lower forms of savages, it would perhaps be 
impossible to understand how a person might owe another 
a certain sum, and have due him a certain sum, and settle 
the account by the payment of the balance or difference; 
but it is a concomitant of civilization that some form of 
book-keeping or accounting makes its appearance along 
with the other characteristics. As civilization progresses, 
we find that the system of accounting becomes more and 
more refined, and that many forms of transactions are 
settled by adjusting differences on paper. A business man 
seldom sees gold in actual circulation; he has its repre- 
sentatives, and even the use of these representatives is 
economized. 

When the speculative exchanges use the methods just 
referred to in settling business transactions by depending so 
largely upon offsets made in books of account, they are but 
utilizing the modern method of doing business ; and, being 
the highest expression of the competitive system, they use 
book-keeping in place of more cumbersome methods even 
more frequently than is done in other forms of business. In 
outside business the amounts placed to the debit or credit 
of the different parties are expressed in terms of money, and 
the quantity of commodities as such is not usually made 
the subject of elaborate book-keeping. As an exception the 
stock-book might be mentioned, in which the attempt is 
made to show by book-keeping methods the stock of mer- 
chandise on hand; and accountants, in some business 
houses, have a system whereby barrels, burlaps, or other 
packages or coverings are accounted for in cases where 
they are not directly charged to a party. Similar instances 
can also be mentioned in various lines of trade. 

Among members of the exchanges, we find the fullest de- 
velopment of the system of keeping accounts of merchan- 
dise. Listening to the talk of a grain broker and his clerks, 



44 VALUE OF ORGANIZED SPECULATION 

one will sometimes hear the "grain balance" referred to as 
of equal importance with the cash balance or the bank bal- 
ance. Upon the European bourses, as previously men- 
tioned, the system of carrying stocks as a book account has 
been more highly developed, for instance, than in New 
York: and the American system, which in this particular 
is not progressive in taking advantage of modern account- 
ing methods, has been criticized as not affording that facil- 
ity of movement in financial matters which is found in 
European systems, and as fraught with greater danger of 
panics and squeezes. But leaving aside differences in the 
speculative markets and the customs of particular ex- 
changes, it is seen that the system of organized specula- 
tion avails itself more completely of modern accounting 
methods than other forms of business. 

In settling accounts in outside business, the difference 
between the two sides of the ledger is- called a "balance"; 
and oftentimes, by the payment of a small balance, large 
items on both sides of the ledger are adjusted. But in spec- 
ulation, as when a commodity is bought for a certain figure 
and sold for a certain figure, the balance due frequently is 
called a "difference"; and it is said in adjusting the ac- 
count that "differences are settled." The word difference 
is again called to mind in this place in order to point out 
that its technical meaning in organized speculation is much 
the same as that of the word balance as ordinarily used 
by a book-keeper in any kind of business. 

The Clearing-House 

After considering some of the numerous methods by 
which parties are substituted and accounts are canceled in 
general business, we come to the clearing-house as the place 
where those accounts that have not been offset or balanced 
in some way are finally adjusted. Here, it seems, is the 
very refinement of the system whereby paper representa- 
tives and book entries are made to take the place of actual 



FEATURES OF ORGANIZED SPECULATION 45 

transfers. Yet here, too, we find that the organized ex- 
changes carry the principle farther than is done in outside 
business. In his ordinary receipts and expenditures the 
grain- or stock-broker has his bank account, and deposits 
and draws checks as does everybody else; and the paper 
representatives finally pass through the clearing system of 
banks the same as any one's. 

But in the speculative transactions made upon the floor 
of the exchange, it is found that the ordinary clearing sys- 
tem does not carry the principle far enough, and many ex- 
changes have a clearing-house of their own, for the express 
purpose of clearing those transactions. The principle of 
clearing is carried farther in such a clearing-house, however, 
because all of a certain class of transactions are at once put 
into the clearing-house without waiting for any other 
method of settlement, and also because some exchange 
clearing-houses not only clear money items, but also stocks 
and commodities. The use of the clearing-house in this 
connection marks the culmination of the manner in which 
the various forms of speculative exchanges supply the 
freest mobility both to commodities and securities, and 
represents the fullest development of that refined system of 
barter so characteristic of modern commerce. 

A Distinguishing Feature 

Upon the speculative exchanges, as has just been shown, 
the observer finds many things which apparently are quite 
new and strange. He finds traders there doing things which 
are common with business men in many different lines; 
but he finds some things done so frequently that he is at a 
loss to understand the process. He sees the actual commo- 
dities on every hand and sees deliveries made. He notes, 
however, that in a great many transactions there are no 
deliveries ; and he finds this made possible by a system of 
sales for future delivery whereby it becomes the easiest 
matter for the trader to sell goods before he buys them. 



46 VALUE OF ORGANIZED SPECULATION 

The illustrations given herein are intended, not only to 
help the reader understand the system, but as an argument 
to show that nothing in its essence different from what is 
seen outside is attempted upon the exchanges. When specu- 
lation is organized, the general effect is the same as that of 
organization in any line — effectiveness is increased. By 
facilitating the process and making it rapid, the volume of 
trading is greatly augmented. It is, indeed, scarcely be- 
lievable that an enormous number of transactions can be 
made in a particular commodity when the actual amount of 
it in existence is, comparatively speaking, so small. For in- 
stance, it is not considered particularly remarkable that a 
grain exchange should trade in as much wheat in one week 
as the actual receipts at that market amount to for a whole 
year. Thus the commodity in stock is bought and sold over 
and over again; or, to speak more accurately, the right to 
possess it is bought and sold the enormous number of times 
referred to. Here we have a distinguishing characteristic of 
organized speculation — the great number of transactions 
in what is called "wind." So great is the number of trans- 
actions that many question the need for them; but, in any 
case, they must be reckoned with, as they have much to do 
with the peculiar phenomena observed. 

Speculators classified 

The instruments which the speculator uses and the sys- 
tem under which he works are not the only things which 
serve to show the identity of his business with other forms. 
Human nature, too, the personal factor, is much the same 
in the pit as elsewhere. But certain human characteristics 
are exaggerated in the trading room, and it is possible there 
to make a more clearly defined classification than else- 
where. The principle of classification, however, is the same. 
Here, as elsewhere, are to be found the people who know 
their business and those who do not know how to conduct 
wisely their own affairs. A talent for speculation is one of 



FEATURES OF ORGANIZED SPECULATION 47 

the rarest gifts a man may have. A speculator, like a poet, 
is born, not made. But in addition to the peculiar talent for 
weighing elements of value, he must also have experience; 
and those persons who think without cause that they pos- 
sess that penetrating vision which belongs to the specu- 
lator also think that they can speculate without experience. 
Hence the most prominent characteristic of the unsuccess- 
ful speculator is his amateurism. 

In the slang of the street these amateur speculators are 
called "lambs." That is to say they are supposed to be 
persons of great innocence; and, if the fact of losing money 
is a proof of innocence, then it must be admitted that they 
are appropriately named. The lambs lose their money, 
which fact seems to be a surprise to many. But there is 
nothing to cause wonder about it. It is the same misfortune 
which overtakes any one who enters any business that he 
does not understand. But there are very few persons who 
are naturally adapted to speculation or have the training 
necessary to engage in it; and, unfortunately, it is a fascin- 
ating business and appears to be easy. Hence thousands of 
persons are continually rushing into it, only to meet the 
pitiful fate which might naturally be expected. 

Ranged against the amateurs or lambs, we have the pro- 
fessional speculators. They occupy the same vantage- 
ground that professionals do in any enterprise, as they 
know what they are going to do and why they do it, and 
have provided adequate means wherewith it may be ac- 
complished. One way in which these professionals make 
profit, and at the same time contribute towards the steady- 
ing of the market, is by keeping money in readiness to make 
purchases and then buying during a panic or depression. 
Thus these seasoned speculators, as a result of their know- 
ledge and their patience, operate with profit to themselves 
and for the good of the commercial world. Henry Clews 
refers to such speculators as old men who have learned by 
years of experience that the time to buy is when everything 



48 VALUE OF ORGANIZED SPECULATION 

looks most discouraging. The following is his picturesque 
account of them: — 

"But few gain sufficient experience in Wall Street to 
command success until they reach that period of life in 
which they have one foot in the grave. When this time 
comes, these old veterans of the Street usually spend long 
intervals of repose at their comfortable homes, and in times 
of panic, which recur sometimes oftener than once a year, 
these old fellows will be seen in Wall Street, hobbling down 
on their canes to their brokers' offices. 

"Then they always buy good stocks to the extent of their 
bank balances, which have been permitted to accumulate 
for just such an emergency. The panic usually rages until 
enough of these cash purchases of stock is made to afford a 
big 'rake in.' When the panic has spent its force, these old 
fellows, who have been resting judiciously on their oars, in 
expectation of the inevitable event, which usually returns 
with the regularity of the seasons, quickly realize, deposit 
their profits with their bankers, or the overplus thereof, 
after purchasing more real estate that is on the up grade, 
for permanent investment, and retire for another season to 
the quietude of their splendid homes and the bosoms of 
their happy families." 1 

Besides the retired business men just described, there 
are, of course, the younger men at present taking an active 
part in financial affairs, who also have money on hand to 
make investment when opportunity offers. These men are 
among the most useful factors in the speculative markets 
and commerce in general, as their business operations tend 
to prevent the development of any kind of commercial 
mania. 

Another class of professional speculators is composed of 
those who "scalp" the market, which means that they 
trade frequently, and endeavor to catch the smaller move- 
ments, being contented with a profit as small as an eighth 
1 Clews, Fifty Years in Wall Street, p. 14-. 



FEATURES OF ORGANIZED SPECULATION 49 

or even, as upon the Chicago Board of Trade, a sixteenth of 
a cent. Scalping is by no means peculiar to professional 
speculators, as the lambs are usually scalpers. But obvi- 
ously the lambs cannot make money by scalping, as they 
must pay commissions. Commissions on the exchanges, 
though proportionately very small when compared with 
other commissions, are yet large when compared with the 
very small profit which the scalper takes. Thus, if he makes 
a gross profit of half a point, and his commissions for the 
round turn are one fourth of a point, his expenses are fifty 
per cent of his gross profit. Few businesses can be profit- 
ably conducted with such a large ratio of expense; and here 
we have one of the reasons why the accounts of the lambs 
make such a poor showing. 

But the professional scalper is a member of the exchange, 
does his own trading, and pays no commissions. He is on 
the floor or in the pit, sees the orders come in, knows the 
different brokers and the kind of customers they have, and 
hence is able to make some estimate at first hand of the 
character of the buying or the selling, as the case may be. 
Some of these professional scalpers succeed; and it is de- 
sirable that there should be scalpers to equalize the market 
and prevent it from responding to every gust and eddy of 
speculative excitement or exaggerated news. 

Besides the kinds of speculators mentioned, we have the 
professional speculators, of which, unfortunately, there are 
too many, who depend upon fraud of one kind or another 
to make the market go where they wish it. This class of 
speculators bears the same relation to the true speculator 
that the quack who suppresses the symptoms of the patient 
bears to the scientific physician who makes an honest and 
correct diagnosis of the difficulty to be remedied and brings 
the patient back to the normal condition of health. The 
dishonest manipulator of the market will be referred to 
more at length when the moral aspects of speculation are 
discussed. 



CHAPTER II 

THE EFFECT UPON PRICES 

As a result of the conditions described in the last chapter, 
we find, gathered upon the exchanges, forces of a peculiar 
and interesting character. The contest that takes place 
may be likened to a battle; and yet perhaps popular 
opinion is partly right when it considers speculative trading 
in the similitude of a slaughter, or, as the saying is, like 
"shearing the wool of the lambs." 

A flock of lambs or of sheep may be headed for the 
slaughter-house or shearing-pen. They may be in charge of 
a competent drover, and we may be reasonably certain that 
they will eventually be deprived of their wool, and perhaps 
of their lives. Yet these helpless creatures have wills of 
their own; and, by their persistently erratic conduct in 
following one another in every direction seemingly except 
the right one, may cause their keeper the greatest trouble. 
He will round them up finally, but in the process they may 
give him a very active quarter of an hour. 

A person who is not a zoophilist may enjoy such an 
unequal contest; and, passing to the business world, the 
trained economist, in his professional enthusiasm, may 
for the moment almost forget that business operations 
require the continued sacrifice of the unfit, and that 
implicit credulity often finds the unscrupulous ready to 
take advantage. Promising later to return to the humani- 
tarian and ethical aspects, we are ready to regard the pro- 
blem from the psychological and material side. 

Upon the floor of the speculative exchanges, which is the 
theatre of the struggle at present under consideration, the 
amateurs or lambs are everywhere in evidence. Like the 



THE EFFECT UPON PRICES 51 

dumb brutes after which they are named, they are unable 
to protect themselves; and the interest which centres in 
their movements is not that which comes from a fair con- 
test. But in the process of transferring their money to the 
pockets of the professional speculators, important effects 
upon prices are observed; and it will be necessary to ana- 
lyze the process in order to account for these effects. 

The Minor Fluctuations 

In the case of organized speculation, custom is of little 
importance in fixing a price, and there is an enormous 
number of orders coming upon the market. The arrange- 
ments are such that any item of news is at once telegraphed 
to the floor of the exchange, and, by a news ticker, to the 
various brokers' offices. The speculators are alert and 
anxious. Most of them are trading upon small margins, 
and the broker has the right to close them out if the margin 
be exhausted. Under the above described circumstances, 
could we expect any other result than that the market 
should be extremely nervous and jerky? No other markets 
except those that are the subject of organized speculation 
display the characteristics just mentioned. 

If a person will watch the quotations as they come in 
upon the tape, he will frequently note the most astonishing 
performances. He will see wheat, for instance, selling at a 
dollar. A minute later, he may be informed by the quota- 
tions coming out that the value of this important cereal has 
changed to a price represented by 99 cents. But scarcely 
has the observer come to realize this fact, when he finds the 
quotations rapidly creeping up till $1.01 is reached. 

Astonished at these movements of the market, he may go 
to the news ticker for explanation. There he may find any 
of numerous reasons assigned. It may be said, for ex- 
ample, that some statesman in a foreign country has advo- 
cated raising the tariff upon wheat; but that, on the result- 
ing decline, good supporting orders were discovered at 99, 



52 VALUE OF ORGANIZED SPECULATION 

which resulted in a better feeling in the pit and hence the 
rise. A variety of explanations may be given; but, to the 
discriminating student, it would appear absurd that the 
value of the wheat should be really affected so strongly and 
so frequently by the comparatively trifling items of current 
news, or that its utility as an article of use was changing 
with each of these many minor fluctuations. 

Yet the conditions are such in organized markets that 
every circumstance which might affect values causes the 
greatest amount of excitement. The news is coming in all 
the time over the tape. There are many traders stand- 
ing about with little to do except to talk; and, of course, 
they will naturally fan any rumor that may start. The 
speculators are greedy and impatient and want their or- 
ders executed quickly. Trades must be made immediately 
if the order be for execution at the market; and stop orders 
and other resting orders described in- the last chapter fur- 
nish an incalculable element which sets at naught some of 
the best predictions and keeps the market in a state of 
feverish activity. 

For instance, a commodity may be selling at 90. Senti- 
ment may be bearish, and a decline may take place to 89f, 
but, at that figure, stop loss orders are uncovered, and 
brokers execute them, causing further uncertainties and 
sales, as a result of which 89j is reached. At that figure, 
we will say, there are waiting orders to buy. The crowd sees 
that the market is supported, and, in the buying enthusi- 
asm that ensues, the quotations are quickly back to 89|. 
But here selling orders are found, and, the sentiment turn- 
ing bearish, a selling fever results with such momentum 
that the market is quickly down, through the buying orders 
at 89j, till at, say 89, fresh stop orders are found. When 
these are disclosed, their execution and the resulting excite- 
ment and terror force the market to 88f , from which point 
there will perhaps be another rise, and so on. The above is 
but an illustration of the manner in which stop orders and 



THE EFFECT UPON PRICES, 53 

other waiting orders combine with the ever-changing news 
and sentiment in tossing the market about in a multitude 
of minor fluctuations. 

The fact that most of the speculators are not serious stu- 
dents of affairs makes their orders, whether waiting orders 
or for execution at the market, extremely ill-judged and 
eccentric. The idea exists among the rank and file that 
the insiders absolutely control the quotations, and that the 
way to speculate is to watch the indications as to what the 
prominent traders are doing. Thus calculations and sta- 
tistics of great pith and moment are disregarded in the 
scramble for tips, rumors, and surface indications. Hence 
the traders on the floor, in the pit, and in the brokers' of- 
fices are continually watching in order to follow if possible 
the lucky and the powerful, and to do the opposite of what 
the weak and unlucky are doing. Consequently the most 
childish rumors are able to influence values; and such 
gossip, as, for instance, that an important corporation 
officer has been speaking to a prominent bull or bear, is 
widely circulated and is considered a valuable tip and a 
means of forecasting prices. 

It is scarcely necessary to enter into argument to prove 
that fluctuations effected by such influences are not legiti- 
mate, for the frequent erratic price movements could not be 
the result of natural commercial conditions. By way of 
contrast, it might be well to call attention to the market 
fluctuations of a commodity which, owing to its destructi- 
bility, is not the subject of organized speculation. Let us 
consider berries, for instance. The prices of such fruit pro- 
ducts vary greatly from day to day, and there may be im- 
portant fluctuations during the day; but they are not the 
subject of momentary fluctuations. 

Another consideration which tends to prove the fact that 
these momentary fluctuations are not legitimate changes in 
value is the curb market of the Chicago Board of Trade, 
which constitutes the only market after exchange hours. 



54 VALUE OF ORGANIZED SPECULATION 

There are sometimes, of course, violent fluctuations back 
and forth upon the curb; but all curb trading is forbidden 
or discouraged by the rules of the board. Hence there is 
little business done; and the curb trading remains com- 
paratively stationary, slightly above or slightly below the 
closing price, till the next morning when the market opens, 
frequently showing no change from the previous day's 
close. Thus the curb in Chicago, being relieved of the enor- 
mous amount of trading by excited speculators, resembles 
those markets in which organized speculation does not 
exist. It is true that the curb is in a sense somewhat organ- 
ized; for, with few exceptions, it is constituted of the same 
brokers who have been trading together during the regular 
session and who naturally follow the usual methods of 
organized speculation. But the orders given for execution 
on the curb are comparatively few. So in one respect, at 
least, it is quite different from a thoroughly organized 
market; and, as might be expected, we seldom find the mo- 
mentary fluctuations observed during the regular session. 
To sum up: organized markets are subject to a great 
number of momentary changes in quotations, caused by the 
manner in which the news is collected and distributed to 
the traders, and resulting in magnifying many items which 
are of little real importance. More than that, the great 
number of utterly unskilled speculators, who are always 
watching to see what some one else is doing, continually 
tend to further the erratic and choppy minor fluctuations. 

Extreme Fluctuations 

The prices of commodities and securities have different 
movements, which in a sense are independent of one an- 
other. There are the choppy fluctuations just referred to, 
and there are the wide swings of price movements which 
usually occupy a much longer space of time. The general 
effect of organized speculation, as explained above, is to 
increase the number and extent of the minor fluctuations; 



THE EFFECT UPON PRICES 55 

but, as regards the large swings, it has the opposite effect 
and tends to bring the limits of such movements together. 
The distance between quotations is much greater where 
speculation is unorganized. In the case of fruits, prices may 
vary 500 per cent, or even 1000 per cent, between successive 
sales. So, too, in the case of real estate; its value is not con- 
tinually changing with minor fluctuations, but there may be 
the widest price movements between different transactions 
in a particular locality. It would be no exaggeration to say 
that a piece of real property may sell at $100 per front foot, 
while the next transaction in equally valuable property in 
the same locality may be at $50 per front foot, or the differ- 
ence might be even greater. It may be safely claimed that 
such wide discrepancies in successive quotations of articles 
subject to organized speculation are unknown. 

The only way to make a statistical comparison between 
a market in which speculation is organized and one in which 
such organization does not prevail, is to consider the price 
record of a commodity both before and after organized 
speculation has been introduced. Such statistics, however, 
should be interpreted with great care. It must be remem- 
bered that speculation is not the only influence operative in 
recent years which has a tendency to bring price limits 
together. The whole modern method of doing business, 
with competition and organization everywhere, has an even 
greater tendency toward the same result. But, on the other 
side, there are strong reasons for believing that, while 
organization of itself tends to steady prices, the greater 
attention paid in recent years to all forms of commerce 
tends to increase the excitability of business men and to 
counteract the quieting effect of organization. 
"In Diagrams I and II are shown the annual range of 
prices of wheat and corn respectively in the Chicago market 
from 1865 to 1910. In Diagram III we have the extreme 
fluctuations of cotton each year from 1830 to 1909. In 
each diagram the differences between the high and low 



56 



VALUE OF ORGANIZED SPECULATION 



prices for the years mentioned are represented by lines of 
proportionate length, so that the reader can readily com- 



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00 
00 


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OS 

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OS 
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DIAGRAM I 
Yearly Range of Wheat Prices at Chicago 1865-1910 



llllllllilllllil 111 



DIAGRAM II 
Yearly Range of Corn Prices at Chicago 1865-1910 



THE EFFECT UPON PRICES 



57 



pare the range of fluctuations. The tables upon which they 
are based appear in the Appendix. 

It will be noticed at the start that there is great irregu- 



s b li o a b b o b b & b ci b bi b b b li b 
OOOOOOOOOOOO oooooooo 




DIAGRAM III 

Yearly Range of Cotton Prices at New York 1830-1909 



58 VALUE OF ORGANIZED SPECULATION 

larity in these extreme movements. To show any tendency, 
a number of years must be taken into consideration. The 
Civil War, too, widened the fluctuations of cotton, so that 
the range during that period should be disregarded. 1 But 
taking note especially of the years following 1870, which 
all observers agree was about the date at which the future 
system of trading became fully developed, a narrowing of 
the spread will be noticed. There have been wide ranges 
since that date, and, especially, in the last decade, the 
spread has been wide in the fluctuations of the cotton 
market. But since 1870, some tendency, even though it be 
a slight one, toward more stable markets will be noticed. 
It must be admitted, however, that the results shown are 
inconclusive, and that allowance must be made before any 
one should consider them of much weight upon either side 
of the controversy. They are introduced principally for the 
purpose of showing the absurdity of the statement, so fre- 
quently made, that, coming in with the introduction of the 
future system, we have had a great increase in the range of 
fluctuations. The tables and diagrams at least show that 
such statements are false. 2 

Statistics are uncertain in this, as in many other depart- 
ments of economics, and it is rather upon a-priori reasoning 
as to what must be the effect of particular economic deter- 
minants that the greatest reliance has to be placed. Unor- 
ganized speculation and speculative business may go to 
almost any extreme before a halt is called to the reckless- 
ness and folly of traders. In the case of organized specula- 
tion, however, there is an important check upon the move- 
ment of prices and upon the cumulative effect of continued 

1 Among the many results on commerce of the Civil War and the 
methods adopted for financing it was the effect of the inconvertible paper 
currency which existed between 1862 and 1878. The use of this currency 
made prices higher for the time, and was one of the causes of the confusion 
and uncertainty in business transactions which resulted in the wide range 
referred to. 

a Cf. Com'r of Corporations, Report on Cotton Exchanges, passim* 



THE EFFECT UPON PRICES 59 

buying. The machinery is so arranged that the opinion of 
the speculator must have weight at the particular time at 
which he acts. In other words, he is free to act in buying or 
selling whenever he is ready. But the fact is not clearly 
shown by statistics because there are so many other deter- 
minants which enter and cause confusion. 

A Market with Two Sides 

In the ordinary flow of commodities from the producer 
to the consumer, there are, as has been shown, both long 
purchases and short sales. Sometimes the business man 
sells what he has already produced or purchased; and at 
other times we find him first selling what he does not own 
and afterwards producing or purchasing in order to make 
delivery. But speculation of any kind implies that the 
speculator does not intend to consume the particular com- 
modity he trades in. His service to society is of a different 
nature, and is described elsewhere in this essay. But his 
trading makes a greater volume of purchases and sales, 
and some method must be provided for making and settling 
these numerous transactions. It is plain that the stocks of 
commodities produced for actual consumption are not suf- 
ficient for this purpose, and hence the field must be broad- 
ened by the use of paper representatives. 

When a commodity is sold for cash in a modern commer- 
cial state, the transaction is usually different from a similar 
transaction in a primitive society. A host of writers have 
pointed out that this cash does not necessarily mean actual 
gold, and they have well shown, that in modern times the 
financial side of a sale may be accomplished by the use of 
one or more of the representatives of gold which banking 
and monetary science have evolved. But our economic 
writers have not been as careful to emphasize the fact that 
commodities other than gold may have paper representa- 
tives, and that a promise to deliver commodities may have 
just as natural a use in business as a promise to pay money. 



60 VALUE OF ORGANIZED SPECULATION 

A promissory note may be made by a party who has not 
the money to pay the note. It may be discounted at a bank; 
and when it is settled, the "payment" may not be in money 
at all; but the amount of the note may merely form one 
item of the page of a ledger at a time when numerous trans- 
actions of a similar nature are settled by book entry. The 
use of this paper representative of money with a short sale 
of gold is necessary in the routine of systematized finance. 
But if there is to be perfect freedom of trade, there must be 
equal facility in using paper representatives on the com- 
modity side of a transaction; and hence the use which is 
made of promises to deliver commodities. There cannot be 
freedom in finance unless a business man has the right to 
accept the promise of another to pay money and to nego- 
tiate the same; and there cannot be freedom in commerce 
unless a business man is allowed to make or accept pro- 
mises to deliver commodities and trade in them. 

In the same sense that the bank is the highest evolution 
and development of the monetary system, so the exchange 
is the highest evolution and development of the trade in 
commodities and securities; and in the same way that a 
bank makes especial use of promises to pay money and 
needs special facilities in order to make the best use of these 
refinements of finance, so the exchange needs to be fully 
equipped, to have full power, and to provide special facili- 
ties for trading in promises to deliver commodities and 
securities. Hence it is that, though short selling is seen 
everywhere in commerce, it is the business of the exchanges 
to provide facilities for it in speculation, and to make those 
facilities so perfect that operations for a decline may be as 
easily entered into as those for an advance. When this is 
accomplished, we have, as a result, a market with two sides. 

In order to bring out clearly the difference, let us con- 
sider first a speculative boom in a market where short 
selling has not been especially provided for. The specu- 
lators pile purchase on purchase, and the price of the com- 



THE EFFECT UPON PRICES 61 

modity mounts higher and higher, it seeming, indeed, that 
no top will ever be reached. But this seeming is not real- 
ized; there is a limit to the folly of man, even when dis- 
played in a speculative boom. A few of the more cautious 
will begin to liquidate; and, if the time be ripe for it, a 
selling movement will so quickly develop that it seems 
almost instantaneous. For a bull, when filled with terror, 
may be a more persistent and demoralizing seller than a 
bear. 

As a result of the tendencies just described, we find, in 
the case of unorganized speculation, that the boom itself 
goes farther, because there is no one to check it, since the 
cool heads have no effective way of making their opinions 
felt on the market. But when at last the bulls themselves 
take flight, we have a condition in which prices will decline 
to a point even lower than that at which the boom started. 
By compelling all speculators to be bulls, we do not prevent 
declines. On the contrary, a market in which there are no 
facilities for the bear to act is one in which the declines are 
most sudden and terrible. 

Turning from the unorganized markets, let us consider 
those in which the speculation is organized, and in which 
an operator, who believes that prices are mounting too 
high, may have weight in the market by selling for future 
delivery. In such a market a trader may be either a bull or 
a bear; that is to say, he may either buy before he sells, or 
he may sell before he buys. Hence the bear, when he sees 
reckless buying and abnormal advances in price, may 
apply the brake by selling. He may do this even though he 
have none of the property on hand; for, through the facili- 
ties provided, he may express his opinion on the market, 
and have that opinion made effective, without having pre- 
viously qualified himself by making purchases. His selling 
will often bring a runaway market to a halt and give time 
for reflection. Its effect upon the market varies according 
to its amount and according to the psychological state of 



62 VALUE OF ORGANIZED SPECULATION 

all concerned; but it will usually be sufficient to cut short 
the worst effects of bullish excitement. The market is thus 
turned downward at a much earlier point than if the more 
sanguine bulls were allowed to fan the flame of speculation 
to the greatest extent possible. 

After the bears have thus demonstrated their power to 
affect the market, and even for a time to gain the mastery, 
the enthusiasm of the bulls is perceptibly cooled, and some 
of the more sensible of them close out their longs; others 
following, prices sag, and a bear market is the result. 

It has been shown above how many of the excesses of a 
bull market are saved by the action of the bears who sell 
for future delivery that which they do not own. It will 
further be called to mind that it was the bears who first 
threw cold water upon the speculative bullish enthusiasm; 
but that, after the market had been brought to a halt and 
the bulls had time to come to their senses, their 'liquidation 
had helped to turn the market from bullishness to bearish- 
ness. In the same way, where there is organized specula- 
tion, the bulls are equally free to initiate a movement; and 
when the bear market appears to be going to excesses, they 
are ready to buy and so reverse conditions. Thus the pes- 
simism that was running to excess is cut short and the 
market turned upward. 

But bears are like bulls in their temperament and their 
human nature. It requires but a hint to show the more 
sensible of them the folly of over-staying their market. As 
soon as their shorts show a good profit and good buying 
appears, they begin covering; and their demand assists 
generally in bringing to a close the excesses of a bear mar- 
ket. In the midst of a panic, when the bulls are but just 
beginning to gain confidence from the few scattering pur- 
chases of the more courageous of their number, the bears 
may act without fear. Their purchases at such a time are 
but to secure their profits; and they may buy with more 
confidence and telling effect than the disheartened bulls, 



THE EFFECT UPON PRICES 63 

who need great courage in order thus to enter into new 
commitments. 

It is not intended here to convey the idea that the bull or 
bear party must each act together in the particular manner 
suggested. On the contrary, every trader is an individual, 
and the trades of bulls and bears dovetail into one another 
in the most complicated manner. In the last few para- 
graphs it was intended merely to discuss the probabilities 
as to which party is likely to have the preponderating influ- 
ence at the different periods of a market movement. After 
a decline, when there is too much of a tendency to pessim- 
ism, the sanguine bull is necessary to pierce the clouds of 
gloom that obscure the sentiment of traders ; but after an 
excited advance, when all the circumstances appear so 
hopeful, the cynical and careful bear needs the facility for 
expressing his opinion upon the market by a short sale. He 
needs this opportunity as much as the bull needs the privi- 
lege of making a long purchase. 

As for the liquidation of the bulls, such sales help to turn 
a bull market into a bear market; but the change of senti- 
ment is effected quicker if the bear has the opportunity to 
assist by his short sales in the selling movement. In the 
same way, the covering of shorts in a bear market assists a 
rise; but the initiative usually comes through the long 
purchases of the bulls. 

Summing up; it may be said that in any case, whether 
the market be organized or unorganized, there is a limit to 
an advance or decline. There is always a point at which 
timid bulls will begin selling, even though there be no 
organization in the speculation. There is always a point at 
which demand will spring up, even though a decline may 
be of the demoralizing character of unorganized specula- 
tion. But in case speculation be not organized, advances 
and declines go to extreme limits, because bears in a one- 
sided market have no way of making their opinions effect- 
ive, either in initiating a bear deal or in closing the same. 



64 VALUE OF ORGANIZED SPECULATION 

Organized speculation, however, permits this conservative 
action of the bear. It helps to cut short the boom by per- 
mitting short sales, and helps to bring to a stop the ensuing 
decline when the short contracts are covered. Thus it is 
that the balance is preserved; and the history of a bull 
market is the same as that of a bear market, with the 
parties and tendencies reversed. 

The Excitability of Speculators 

Such is the ideal effect of the two-sided market furnished 
by organized speculation. Yet there are always counter- 
acting influences; and, in the subject under discussion, the 
excitability of speculators brought about by close associa- 
tion and organization should be mentioned. 

Almost all speculators, though they ought to know the 
danger of their calling, are nevertheless reckless. This is 
true in the case of unorganized speculation as well as in that 
of the organized kind. It is scarcely necessary to do more 
than refer to recent land booms in different parts of the 
country to substantiate this position. Nevertheless, it 
must be admitted that organization, which makes it so 
easy to speculate, gives opportunity for the speculator to 
act more quickly than he could in the absence of the special 
facilities provided. Hence the speculative exchanges, being 
organized for the purpose of furthering speculation, nat- 
urally fan the speculative fever and render it possible to 
urge men on in masses to do reckless things that they would 
in some cases shrink from if acting singly. 

The result is that the steadying effect of a two-sided 
market is to some extent neutralized. By the use of an 
effective system of news dissemination, market letters, 
and false rumors, the leaders of the market too often suc- 
ceed in hypnotising their poor dupes, the amateur specula- 
tors. The insane boom of bullish enthusiasm may be 
counteracted by short sales; and yet the few cool heads, 
although possessed of millions of money, may not be able to 



THE EFFECT UPON PRICES 65 

cut short the boom till the infatuated bulls have so com- 
mitted themselves that the decline or reaction in prices will 
surely ruin them. And a bear market will sometimes, though 
not so often, run to a ruinous extreme. 

A Summary 

In the speculative market, as in all markets, there are 
cycles within cycles in which there is action and reaction 
in the greatest complexity; and the tendencies described 
are not always apparent, although each must have its 
effect in determining the prices that issue. At this point it 
may be convenient to sum up the tendencies that have been 
described thus far. 

The great mass of amateur speculators, whose deals con- 
stitute the bulk of speculative transactions, render an ex- 
change market extremely erratic and fluctuating. The fluc- 
tuations so caused reflect simply their inexperience and want 
of discretion. Like the amateurs in any line, they serve 
to hinder the professionals from properly doing their work. 

As regards the long swings of the market, the amateurs do 
not have so great an effect; and the operations of the pro- 
fessionals, under the conditions prevailing in organized 
markets, have a strong tendency to narrow the range of 
fluctuations which the excitable nature of the speculators 
would otherwise further. In the early stages of a boom, the 
short seller cuts off what might have developed into great 
speculative excitement; and later, when a decline has 
resulted, he assists in stopping it by his purchases to cover. 
Thus short selling — that essential characteristic of organ- 
ized speculation — has an important tendency to curtail 
the extremes to which excitement and over-trading would 
otherwise lead. 

Depressing Prices 

But beyond the speculative influences already men- 
tioned, there are others which may give a market either a 



66 VALUE OF ORGANIZED SPECULATION 

bearish or bullish trend. Such a tendency may be caused 
by organized speculation, and may be an ever-present 
factor. Yet, notwithstanding the different opinions of 
some others, the writer takes the position that any such 
untoward tendency toward bullishness or bearishness in 
average prices, caused by speculators, is strictly limited in 
its field. Thus the price of wheat in this country cannot be 
kept at such a high figure that the surplus will not be ex- 
ported at any time during the crop year. In the same way, 
it cannot be kept at such a low figure that farmers will not 
produce it. Or stocks and securities cannot be kept at such 
high figures that other investments will absorb all the cap- 
ital offering. Nor can they be kept at such low figures that 
every one having funds to invest would put them all into 
securities listed upon the speculative exchanges. But it is 
possible for speculation to cause price levels, which, for a 
considerable period of time, are different from those which 
would otherwise prevail. 

The limitations above stated, however, are not generally 
admitted; and the opinion is usual among the rank and file 
of speculators that the leaders of the market can put prices 
exactly where they wish. Among outsiders the opinion is 
that the movements of the market attributable to ex- 
change trading can overcome all other price tendencies; 
and, particularly, that they can depress prices to an in- 
definite extent. 

This idea comes of excellent parentage, for it is advo- 
cated by the farmer. The producer of agricultural com- 
modities, it is argued, must be a practical man. He knows 
what soil and climatic conditions are needed to grow crops, 
and he has devoted himself so faithfully to their culture 
that he understands the commercial processes which ensue 
after the commodity leaves his hands. He knows, for in- 
stance, how difficult it is to grow wheat. Yet, upon the 
Board of Trade, speculators may agree to deliver agricul- 
tural commodities in the future, and contracts to deliver 



THE EFFECT UPON PRICES 67 

are accepted in the general course of trade. It is natural, 
then, for the farmer to argue that it is easier to produce in 
this way something that will satisfy the demand for his 
crops than by the old process of sowing and reaping; hence 
he sees in the speculative seller a most dangerous compe- 
titor. 

To him who believes in the specialization of functions, it 
would appear that the farmer knows on the average about 
as much in regard to the grain trade as the Chicago Board 
of Trade man knows about farming. But inasmuch as 
many persons believe in the kind of reasoning just referred 
to, and sweeping and drastic laws are frequently proposed, 
and sometimes enacted, in pursuance thereof, it will be 
necessary to give the arguments so arrived at detailed 
attention. 

The Demand and Supply 

It will not be questioned that the prices of commodities 
and securities are governed by demand and supply as inter- 
preted and explained in the writings of the leading econ- 
omists. But, in order to understand dealing upon a specu- 
lative exchange, it is necessary to have as clear an idea as 
possible in regard to what it is that parties are trading in 
when contracts are entered into for future delivery. As an 
instance let us consider wheat sold for July delivery. When 
the month of July arrives, the warehouse receipts may be 
delivered on the contract and the trading in it at that time is 
much the same as dealing in the actual commodity. 

But when we are trading in July wheat before the time 
for delivery, it would appear that the resemblance of the 
future to spot wheat is not so close. If we go by the letter 
of the contract, no deliveries of wheat may be made until 
the month of July; and in the period before July 1, the 
thing that is in the minds of the traders, the thing that 
passes through the clearing-house, and, consequently, the 
thing that is actually dealt in, is contracts — not actual 



68 VALUE OF ORGANIZED SPECULATION 

wheat. In the subjective estimate of the value of these con- 
tracts made by the traders they naturally consider the like- 
lihood of large or small supplies of actual wheat in the 
future. But the direct cause of the value which they 
assign to them is their estimate of the demand and supply 
of contracts. 

For these contracts may have elements of value which 
are not directly dependent upon the use to which the actual 
wheat can be put. This is readily seen in the case of a 
squeeze or corner. When the rumor is heard, for example, 
that strong parties are getting control of the July option, 
the shorts naturally become apprehensive and begin to feel 
some doubts as to their ability to deliver the wheat when 
the month for delivery comes. They bid for July contracts, 
therefore; not necessarily because they think that wheat 
will be higher next July, but, it may be, because they know 
that a purchase of a July contract will free them from the 
obligation entered into by the sale of such a contract. 

A trader may be of the opinion that actual wheat will be 
lower next July, and he may therefore feel assurance that, 
if he keeps his short contract good, he can cover at a profit 
when that month arrives ; but he may be afraid that wheat 
will, in the interval after the time of making the deal, say 
March, be manipulated upward, and his margin found in- 
sufficient. Thus the July contract may have a value to him 
in the interval independent of the value of the actual wheat 
when it is delivered. 

The doctrine here advanced in regard to grain contracts 
having a value in some respects independent of that of the 
actual commodity called for is no different in principle 
from the doctrine generally held in regard to other con- 
tracts. Let us consider a railroad bond, for instance. In 
its ultimate analysis such a contract is one to deliver a cer- 
tain amount of gold officially stamped and certified by the 
Government; and an important change in the value of gold 
would of course have its effect upon the value of the con- 



THE EFFECT UPON PRICES 69 

tract. If an intending investor, however, should seek in- 
formation from an expert in regard to the value of a parti- 
cular bond, the arguments brought forward would have 
little to do with the value of gold, but would be principally 
concerned with such questions as the loaning rate for 
money, the time of maturity of the bond, or the ability and 
honesty of the parties managing the property — questions 
quite aside from the value of the gold that the bond in its 
ultimate analysis calls for. 

When the title to a bond changes hands, one party simply 
steps into the shoes of another, the purchaser having the 
rights of the previous owner in enforcing the contract. It is 
the same with any contract, as, for instance, one to deliver a 
house, a boat, or a quantity of grain or pork. If one party 
be substituted for another, it is really the contract with its 
rights and obligations that changes hands and not the thing 
which would be called for by its literal enforcement. 

The reason why this fact is not generally recognized is 
probably because a bond is formally printed and signed and 
passed from hand to hand when sold, and is seldom settled 
by the payment of actual gold. But a contract to deliver 
wheat upon an exchange is not usually shown to its pur- 
chaser ; and more frequently than in the case of a bond, it is 
settled by the actual delivery of the commodity called for. 
It is true, however, that any special value which a contract 
may have over and above the value of the commodity to be 
delivered is more frequently referable to speculation or 
manipulation, if the contract be to deliver wheat, than in 
the case of a bond ; and the condition of the market brought 
about by the so-called artificial factors just mentioned is 
usually referred to as its technical position. 

But whether artificial or not, technical conditions should 
not be ignored; and those writers, who argue that the 
market can be depressed by the offer for sale of wheat con- 
tracts, have a large measure of truth in their favor. In 
market estimates by traders, the technical position is con- 



70 VALUE OF ORGANIZED SPECULATION 

sidered highly important. In newspaper reviews, also, the 
nervousness of the shorts and the oversold or overbought 
condition of the markets are frequently referred to. 

If it were not true that technical market conditions 
affected the prices of a commodity or security, then there 
could be no such thing as manipulation of the market for 
futures by offerings to buy or sell. The importance of de- 
mand and supply for contracts is further seen in the fact 
that some traders successfully scalp the market who pay 
no attention to the influences affecting the supply and 
demand of the actual commodity or security. They are 
traders of great quickness, who understand human nature 
and know the people associated with them and the condi- 
tions prevailing in the pit or on the floor. 

When it is further remembered that the great unwieldy 
mass of contracts owned by amateur speculators are 
weakly held, that margins are being exhausted and con- 
tracts thrown upon the market for that reason, that a cover- 
ing movement caused by apprehension of shorts is of almost 
daily occurrence, and that there are a great number of 
traders whose principal use of a contract is as a counter in 
the game of speculation, it is seen that a contract has a 
value of its own which may be greater or less than the 
future value of the commodity which it calls for at the time 
of its delivery. After making all due allowances, therefore, 
one of the most important things to take note of is the de- 
mand and supply of contracts, considered principally from 
the standpoint of their use in canceling trades in the specu- 
lative markets. 

It is the mistake of the anti-optionists, that, while they 
can see this supply of "wind" or "paper" wheat or other 
commodity which is manufactured upon the board of 
trade, they cannot see the demand for it. Yet the demand 
for "paper" wheat is more important than the supply of 
the same, because the average speculator has a prejudice 
for the buying side, and is continually giving his broker 



THE EFFECT UPON PRICES 71 

orders to bid for the futures whenever he thinks that there 
is any possibility of a rise in price. The prejudice of the 
rank and file of speculators for the bull side is so thoroughly 
understood, and has been so widely commented upon, that 
it does not need to be further emphasized. 

The professional operators are smart enough to see the 
advantage of utilizing this prejudice ; for the psychological 
element, so important in all price-making, is by no means 
neglected by the great leaders of the market. They have 
under their observation the supply of contracts, the 
"wind" wheat which is manufactured principally to specu- 
late with, a supply which cannot be used to meet the needs 
of millers or exporters till delivery time arrives. But 
against the supply, they note an even greater demand for 
this same "paper" wheat from traders who wish it purely 
for speculative purposes. What, then, is the result? The 
demand for "wind" wheat is greater than the supply of the 
same; and it is readily seen why it is that the market for 
futures always has a tendency to rise, even on the slightest 
provocation, and why manipulators so often are found tak- 
ing advantage of this tendency by working the market 
upwards. 

The Temper of the Speculators 

Since the demand and supply of contracts are so im- 
portant in determining price, we are led to consider the 
state of mind of the traders in contracts, and the peculiar 
nature of the contract itself as affecting their psychological 
condition. The important points to be thus considered are 
that the majority of traders are naturally bullish, and that 
the terms of a short contract are such that the bears are 
always apprehensive lest they be driven into some kind of 
a squeeze or corner. 

The market manipulator must manage his crowd of 
reckless, rash, eccentric traders by conforming to their 
prejudices and taking advantage of their weaknesses. He 



72 VALUE OF ORGANIZED SPECULATION 

must conform to their prejudices by being especially sure 
of his ground if he opposes them. The time when they 
become dangerous is when they stampede; for at that timet 
like a herd of frightened cattle, they lose all reason, and, 
closing their eyes, rush on, destroying not only themselves 
but their keeper. 

To one who is familiar with the psychological nature of 
the average speculator, it will be apparent that anything 
like bearish operations must be tabooed till prices have first 
been forced to an unnaturally high level. For the manipu- 
lator to force prices below the real value of the commodity 
is dangerous in the extreme. But he is not always sure as to 
whether prices are above or below their natural level; and 
there are a host of semi-professional dealers and a consider- 
able number of amateurs who are bears and who sell short. 
Furthermore, these bears know the danger of the contract 
that they have entered into. While many of them are quite 
uninformed about the actual commodity and have no 
facilities for getting it when the time for delivery arrives, 
they know that, for them at least, the only practicable way 
in which they can cover their short is by buying a long con- 
tract. They know how the price may be manipulated, and 
how they may find themselves at any time under the power- 
ful necessity of bidding for the commodity amid a host of 
stampeded shorts, and they are fully aware of the usual 
effect of such a contest. It is because these things are so 
well in mind that such frequent reference is made in market 
reviews to the fact that prices have risen, or may rise, as a 
result of the covering of shorts. 

There are others beside the amateur speculators and the 
frightened shorts who assist the market manipulators in 
putting up prices. It is to the interest of the commission 
man that the market be advancing ; for he knows that in bull 
markets there is more trading; and, when trading is large, 
there are many commissions. Hence the broker will fre- 
quently send out bullish circulars hoping to get his clients 



THE EFFECT UPON PRICES 73 

to buy; and he stands ready to aid in any way in working 
up a buying fever of excitement. 

When a commodity is selling upon the basis of its de- 
mand and supply and regularly passing into consumption, 
the market manipulators can buy it with comparative 
safety. They have a chance, which is much more than an 
even one, that the next movement of £he market will be 
upward. Having loaded up with a good line and the bull 
campaign having opened, the manipulators take advantage 
of the assisting influences above described. They nurse a 
short interest; then they proceed to stampede the shorts 
into buying and spread terror among them by giving out 
rumors of possible corners and squeezes. They manipulate 
the news, give out bullish interviews; and, assisted as they 
are by the prejudices of the amateur speculators, by the 
covering of shorts, and by .the self-interest of the broker 
in seeking commissions, generally do succeed in working 
up a bullish excitement. 

This matter of fighting the bears is always important in 
organized markets. The bear, by his contract, has agreed 
to deliver something that he does not own. Whether or not 
he can purchase that something at the proper place and 
within the prescribed time, is a question; and, by the very 
conditions of an organized market, there are many others 
who have entered into similar contracts. The supply either 
of a security or of a speculative commodity is for most 
practical purposes limited. The stock of corporations can- 
not be increased except in conformity with fixed legal pro- 
visions. In the same way the supply of speculative agricul- 
tural commodities cannot be increased till the next crop is 
harvested; and all crops are subject to numerous vicissi- 
tudes. Hence the bear who knows his business is most 
cautious and runs at the slightest scare. 

After an advance has been engineered, the manipulator 
must know when to stop. If the price of wheat, for in- 
stance, were put to the very highest figure to which it could 



74 VALUE OF ORGANIZED SPECULATION 

be forced, consumption would be reduced, production 
would be increased, and an enormous supply would pile up, 
which could not fail to cut short the advance. Even before 
that event occurred, the short selling would begin to turn 
the market. Knowing that others will make such sales, the 
professionals who have manipulated the advance anticipate 
future events by closing their long lines and going short in 
the midst of the bullish enthusiasm and excitement, which, 
to the superficial observer, appears to have such force that 
it will never stop, but which, to the far-seeing speculator, 
will soon usher in a decline. The market then sags off as a 
result of the influences above mentioned. 

Hence a market upon the speculative exchanges will be 
one in which the price moves upward from a basis where 
the commodity will pass into consumption, but in which 
it afterwards sags back to that basis. Upon the Chicago 
Board of Trade it is a tradition that the wheat must be low 
enough during the crop-moving season so that contracts 
may be made for a reasonable amount of it to be exported; 
but for many months of the year the market will be above 
an export basis. Indeed, it could not get much below such 
a basis, as there are so many artificial influences ready at 
any time to send it up on the slightest excuse. The same 
principles which govern wheat control also cotton and 
other speculative commodities, the course of a market 
being in the same way from a consumption or export basis 
upward and then back to such a basis, but little below it at 
any time. 

The above discussion applies to the contract grades. 
The other grades sympathize with the movement in the 
prices of futures and of the grades on which futures are 
based; but they do not always have the important upward 
rushes in price that are such a familiar feature of the future 
market. Hence the non-speculative grades have, to a con- 
siderable extent, the advantages of organized speculation 
without its disadvantages. By reason of the fact that they 



THE EFFECT UPON PRICES 75 

sympathize with the movement of the speculative grades, 
the steadying effect of short selling and a two-sided market 
is communicated to them. And, inasmuch as they are not 
themselves speculative favorites, they are not subject to 
the frequent ups and downs with momentary fluctuations 
which are characteristic of the future markets. Further- 
more, even at times when the contract grades are so high 
in price that exports are shut off, the non-contract grades 
may go out of the country or pass into consumption. 

The relative prices of contract and non-contract grades 
should throw much light on the question of the effect of 
organized speculation. When a grade is made deliverable 
on contracts, it has a tendency to make a demand for it for 
speculative purposes and to raise its price. But the con- 
tinuous shifting of numerous commercial factors, all of 
which have their effect upon prices, renders it impossible 
to show such a tendency by a table of price movements. 
The following account of the experience of the Chicago 
Board of Trade in making different grades deliverable in- 
dicates the sustaining influence of speculation on prices : — 

"Up to 1891 we accepted No. 2 wheat, no matter of what 
variety. The wheat then produced in Iowa, Nebraska, and 
other sections tributary to this market, was a variety incap- 
able, by reason of its inherent qualities, of being manufac- 
tured into a high grade of flour. It was so inferior to No. 2 
Red, No. 1 and No. 2 Northern Spring, that the millers 
bought these latter grades and let the No. 2 Spring, the 
grade above referred to, alone. It accumulated here to the 
extent of several millions of bushels. When the late William 
T. Baker was elected president of the Board in 1891, he, in 
his inaugural address, advocated the amendment of our 
rules so that they should provide only for the delivery of 
No. 2 Red and No. 1 Northern Spring. The rules were so 
amended by vote of the association. The effect of this was 
to completely stop the production of inferior wheat. So 
long as it was deliverable on contracts for future delivery, 



76 VALUE OF ORGANIZED SPECULATION 

it of course had a good market. It sold then on that basis. 
The other grades always, that is, the No. 2 Red and 
No. 1 Spring, always sold at a premium over it, but 
when this delivery privilege was taken away from it, 
farmers stopped raising it. 

"Again the No. 2 Hard Winter Turkish wheat, mainly 
produced in the tablelands of western Nebraska and west- 
ern Kansas, northern Oklahoma and the Pan Handle of 
Texas, for many years was not deliverable on contracts for 
future sales. After a few years from the time its production 
in the United States was begun, it was made deliverable at 
5 cents discount, later this was made 3 cents per bushel dis- 
count, and then this penalty was removed and it was made 
equal with the other grades. Its production thereby was 
increased, and now it is not only produced as largely as ever 
in the territory named, but also in Missouri and Illinois. . . . 

"I suppose that it may be truthfully said that this is a 
question of making a market and of destroying a market, 
and that such result might have been reached through 
ordinary merchandising channels of the millers, yet, so 
soon as the delivery on future contracts was affected, the 
production of the grain was materially affected. May we not 
say, then, that if it could stop the production in the one 
case, and increase it in the other to a very perceptible 
degree, that it has a pronounced influence on values? That 
it upholds and adds to the value of that which is desirable, 
that it bears down and obliterates that which is unde- 
sirable?" l 

To the writer it seems highly significant that the stock 
of a grade should accumulate while it is good delivery on 
contracts and that the production of a grade should be 
largely increased after it is made deliverable. The effect 
of organized speculation is to make a demand for commodi- 
ties. It would not be possible to float a number of con- 

1 From a memorandum furnished by Mr. John C. F. Merrill, formerly 
President, now Secretary of the Chicago Board of Trade. 



THE EFFECT UPON PRICES 77 

tracts in all of which the seller legally obligates himself to 
deliver commodities without making some net demand. 

As regards stocks the same tendencies are to be noted. 
There is the same bullish prejudice among the rank and file 
of speculators, and there is the same well-founded feeling 
of apprehension on the part of the shorts, and the same 
class of professional speculators ready to take advantage 
of these facts. The value of a stock, considered as an in- 
vestment, is determined by the nature of the security, its 
class and conditions of issue, and, especially, the earning 
power of the property which it represents both present and 
prospective. There are so many conditions entering into 
the problem that one can hardly present any tables or 
statistics which will prove the point. For instance, tables 
might be presented showing that the stocks listed upon the 
New York Stock Exchange sell at an exceedingly high price 
when we take into consideration the dividends that they 
pay. But such a table would be inconclusive from the fact 
that there are advantages of holding the title to property 
in the form of stocks other than that of having them listed 
upon the stock exchange. Thus property may be more 
easily handled and divided, and enterprises may be more 
easily financed, in that form. Still it is significant, as far 
as the argument may go, that listed stocks sell at high 
prices when their earning power is considered. 

Perhaps the best indication that organized speculation 
has a tendency toward giving stocks a higher value is the 
attitude of those who have them to sell. The promoters 
and organizers of great companies are the manufacturers 
of stocks in the same way that the farmers are the pro- 
ducers of agricultural products, and u£onJJie stock ex- 
change we have the same general -cliaracteristics of dealing 
as upon the board of trade. Stocks may be either bought 
for long account or sold for short account with the greatest 
facility and can be held for either account for considerable 
periods of time. Yet the promoters and others interested 



78 VALUE OF ORGANIZED SPECULATION 

in marketing stocks are anxious to get them listed upon the 
exchange, even though the conditions may be onerous; for 
they know that there is the place where undigested securi- 
ties are best made digestible. The reason why these manu- 
facturers of securities take such a different view from that 
of producers of agricultural products, is because these pro- 
moters are usually familiar with the ways of organized 
speculation and know the tendency of a market so gov- 
erned; while the farmer, as a usual thing, knows little of i 
speculative markets. 

Corners 

The nervousness of the bear, and the dangerous nature 
of the contract that he has entered into, have been referred 
to; and he is not apprehensive without cause. The pur- 
chaser of a commodity may have a light margin; but he at 
least knows that there is a limit beyond which the price 
cannot decline. The short seller, on the contrary, knows 
no limit to a possible advance in price. The purchaser of 
wheat at $1 knows that at least $1 per bushel will be the 
extreme limit of margin calls. But the short seller, on the 
contrary, has no such assurance. The commodity may go 
to $2 per bushel, and even then he will be in doubt as to 
whether the top is reached. 

The corners which have occurred are a perpetual object 
lesson in the mind's eye of the bear, warning him of the 
danger of his position. Such price movements may take 
place entirely independent of the value of a stock for an in- 
vestment or of a commodity for use. They furnish the ex- 
planation of the advice celebrated for its wisdom, but 
notorious for its bad grammar, which is said to have been 
given by Daniel Drew, namely, — "Young man, don't you 
never sell nothing that you don't own." 

In the year 1897 the agriculturalist in this country was 
perhaps more discouraged than at any other time before or 
since; and it seemed as if there was no demand for anything 



THE EFFECT UPON PRICES 79 

that the farmer or planter produced. The price of wheat, 
for instance, had fallen, and all looked to it as an index of 
values for agricultural products. The farmer, it appeared, 
was destined to grow his crop, bring it to market, and get 
for it the most absurdly low price. Every product of the 
farm was at the lowest ebb. Cotton, cereals, butter, eggs, 
vegetables — all were low in price. But in the summer of 
the year mentioned, there were noticeable some signs of im- 
provement. A mysterious upward movement began in 
wheat alone of all commodities; and the news soon came 
upon the tape that Joseph Leiter was attempting a corner. 
Amidst the sneers and gibes of those who believed that the 
farmer must always suffer in silence, and while agricultural 
products that were not the subject of organized specula- 
tion still remained low, the wheat market was manipulated 
upward until $1.85 was reached. The high point in the 
price movement of the cereal was soon passed, as corners 
are but temporary, and only wheat deliverable on futures 
rose to the price mentioned. But this startling example, 
occurring at that particular time, was enough to give an in- 
dication, even to the most careless observer, as to who it is 
that is ever ready with any excuse to raise prices. 

The writer makes no defense of corners considered from 
either a moral or commercial standpoint; but he confesses 
that he fails to follow the arguments of those who hold that 
organized speculation puts prices down. If, as has been 
said, the speculators have only to sell any quantity of 
"wind" or "phantom" wheat in order to cause a decline, 
why did they not do it on this particular occasion? The 
facts are that the price went up because so much wheat 
had been sold and the shorts were so anxious to cover. 
Even upon the board of trade, speculators cannot be 
found foolish enough to sell indefinite quantities of short 
wheat, nor would they have money enough adequately to 
margin the enormous quantities frequently supposed. 

Or, again, if the reader had been watching the quota- 



r 



80 VALUE OF ORGANIZED SPECULATION 

tions as they came over the ticker at the time of the Hut- 
chinson corner in 1888, when the manipulated future went 
to $2 per bushel, the other futures following much behind, 
how could he help but be impressed with the idea that 
organized speculation is more important as a cause of 
advances in price than of declines? 

The Commodity in Store 

The warehouse receipts which are deliverable in settle- 
ment of contracts are merely the representatives of so 
much of the commodity, and the law is strict which pro- 
hibits the forging of these receipts or their issue in excess 
of the amount in store. But, referring to the futures of 
wheat, this "wind," as it is sometimes called, may be 
created in any amount, provided there be parties who are 
willing to run the risk of so creating it and who put up se- 
curity. All that is necessary to bring-into existence a lot of 
5000 bushels, or any number of bushels, is for a seller and a 
buyer to agree on a price for the wheat to be delivered in a 
future month; and if proper margins are deposited, this 
contract, this "wind " — whatever it may be called — en- 
ters upon the market and constitutes a part of the supply 
of contracts. On the other hand, it must be admitted that 
an indefinite number of legal obligations are not likely to 
be entered into without any provision for ever fulfilling 
those obligations. While it is freely conceded that "wind" 
wheat can be created to any amount, subject to the condi- 
tions just mentioned, yet sane business men will not enter 
into large contracts for the delivery of the commodity un- 
less there is a supply of it in the elevators, or in the country 
contiguous in such a position that it can, if the need should 
arise, be placed in the elevators in time for delivery. And 
the tendency always is to pile up the reserve in the delivery 
city, in order to give a feeling of security to the bears 
who may be called upon for a literal fulfillment of their 
contracts. 



THE EFFECT UPON PRICES 81 

In order, then, to have a broad speculation in wheat with 
extensive short selling, we must have a large reserve; and 
in order to furnish this reserve, a great demand is made on 
the farmers to bring forward the wheat, thus tending to ad- 
vance the price of the cash article. It is common, in farm- 
ers' institutes and in publications that are devoted to the 
supposed interests of the farmer, to advocate the segrega- 
tion and holding of agricultural products in order to keep 
up the price. We have the celebrated "Hold your Wheat" 
circular of some years ago as an example; and numerous 
combinations of the sort have been organized for holding 
wheat, cotton, and other agricultural productions. Gov- 
ernments, too, in different countries have undertaken to 
hold coffee, raisins, and other commodities for the purpose 
of advancing the price. 

If it be thought desirable to raise the price of a commod- 
ity by holding a large quantity of it from pressing on the 
market, the method described above, which is now in op- 
eration upon the speculative exchanges, is by far the most 
effective. The volume of speculation is so large that even 
the few deliveries which take place, though they are but a 
small percentage of the amount represented by the con- 
tracts traded in, are yet of considerable size in the absolute. 

The advantage of this method can perhaps best be ap- 
preciated by comparing it to methods that are similar,with 
the exception that the buyers are other than the specula- 
tors to be found upon the exchanges. The most successful 
of these schemes is the so-called valorization plan for rais- 
ing the price of coffee. 

The State of Sao Paulo in Brazil, finding that the coffee 
planters were oppressed with very low prices owing to the 
large crop of the season 1906-07, undertook the experi- 
ment of buying coffee and holding a part of the purchases 
from the market, with a view to enhancing the price. This 
it was able to do through loans made by international 
syndicates. 



82 VALUE OF ORGANIZED SPECULATION 

As for the success of the scheme, it must be admitted 
that there has been a great rise in the price of coffee during 
the five years that the plan has been in operation, and part 
at least of this advance should be attributed to valoriza- 
tion. Nevertheless, there is little reason for considering it 
the controlling factor. It would carry this essay too far 
afield if an attempt were made to discuss all the influences 
which have affected the price of coffee during the last few 
years. It should, however, be called to mind that the crop 
of coffee in 1910-11 was little over half of that of 1906-07, 
and intervening crops have also been small; hence there 
is as good reason for saying that the crop situation enabled 
the valorization scheme to keep on its feet as there is for 
saying that valorization controlled and overcame the crop 
situation. Furthermore, the well-known fact that nearly 
all commodities have advanced in price in recent years 
(some of them more than coffee) should throw further light 
upon the matter. Thus there is slight justification for de- 
claring that the rise in the price of coffee is necessarily to 
be attributed to valorization. 

The best way in which the two methods of enhancing 
prices can be compared is by considering the economic 
strength of the respective forces that are behind them. In 
the case of a scheme such as that for valorization, in which 
the Government or a syndicate buys a quantity of the com- 
modity for the express purpose of raising the price, we have 
a demand which has been created for purely manipulative 
purposes; and the buyers in such case are naturally timid. 
Such an agreement also is likely to be tainted with illegal- 
ity, as witness the attack of the United States Government 
upon the valorization scheme. In the case of a syndicate, 
there is danger that one member of the syndicate or com- 
bination will sell out on the others. If the commodity be 
pooled in such a way that no member may sell his share, it 
is still possible to sell the commodity short. And even in 
a case in which a sovereign state is behind such a venture, 



THE EFFECT UPON PRICES 83 

there is doubt as to whether it could overcome the laws of 
trade. 

In contrast we have the action of the speculative ex- 
changes, in which the demand is backed by certain powerful 
moving forces in human nature, so strong that there is a 
perpetual stream of speculators entering the market to bear 
the load. And usually the new traders coming in are more 
than able to take the place of those who drop out. The 
speculators, also, be it noted, have not been over-persuaded 
to undertake to carry the commodity, but have under- 
taken it voluntarily, through the hope of personal gain; and, 
however delusive their hopes may be, the human passion 
that moves them is one of the strongest. 1 

The writer is well aware that a large supply of the com- 
modity piled up in the elevators and warehouses is a bear 
argument. The traders make a mental estimate of the 
amount that, in their opinion, should constitute the pro- 
per stock in a particular position; and, if the actual stock 
appears large, they have a tendency to become bearish and 
sell the commodity. The gauging of the proper price by the 
relative size of the stock on hand is one of the very best 
methods of legitimately determining values. But the con- 
siderations just mentioned by no means negative the idea 
that a large average stock is rendered necessary by the fact 
that there are so many short contracts afloat, and that the 
bear must have some of the commodity in sight in order to 
give him even such little legitimate ground as he has for his 
confidence and his recklessness. 

Furthermore, when it is said that the tendency of organ- 
ized speculation is toward large stocks of the commodities 
traded in, it is not denied that there are other tendencies 
which may at times exercise the controlling influence. 

1 As regards the value of securities the well-known failures of govern- 
ments to bolster up the value of inconvertible paper money and other 
obligations need scarcely be called to mind. Cf. Conant, The Principles of 
Money and Banking, book vi, chap. iv. 



84 VALUE OF ORGANIZED SPECULATION 

Modern means of communication and methods of hand- 
ling business have been so perfected that it is possible to 
pursue what is called the policy of buying from hand to 
mouth. Hence an importing nation, such as Great Britain, 
may, under present conditions, carry a smaller stock than 
would have been thought necessary in former times. In- 
deed, the English often complain that their stocks are too 
small under modern trade conditions, especially in view of 
possible wars. However, the facts just referred to by no 
means prove that speculation is not the cause of larger 
world's stocks, other conditions remaining the same. What 
they do show is merely that an importing nation is forcing 
the exporting nations to carry stocks in accordance with a 
general tendency observable on every hand. Taking the 
wheat market as an example, it is readily seen that the 
large quantities of the cereal held in the speculative cen- 
tres ready to deliver on contracts; and the habit of the 
speculators in building up such large stocks before they 
will commit themselves extensively on the bear side, con- 
stitute a demand for it; thus enabling this country, for in- 
stance, to carry the stock with little pressure upon the pro- 
ducers, as it is the speculator who pays the bill. 

At short range the speculative contest resolves itself into 
a fencing match which centres around the question of 
whether these supplies are large enough to meet the needs 
of the bears. There is always wheat enough for actual use 
in the countries of modern development. Any unseemly 
scramble among millers to buy wheat or among consumers 
to buy flour causes only a mild disturbance. But upon the 
board of trade it is apparent that the price fixed is often 
above that at which the commodity would actually pass 
into consumption. Bears are always trying their luck to 
see if they cannot sell short and so reap a profit by a de- 
cline to the natural price, but their attempts to do this are 
continually thwarted by squeezes, and, more rarely, by real 
corners. So the price is forced up and kept high for consid- 



THE EFFECT UPON PRICES 85 

erable periods of time by the repeated demands of the 
shorts for the commodity to fill their contracts. 

The old supply is usually withdrawn each year; but a 
part of it is continuous, as a certain amount of the new 
crop is put back into the stock. From this fact some might 
draw the conclusion that, as one crop replaces another, 
there is no new demand for speculative purposes from year 
to year. But this supply, which is necessary in order that 
there may be any speculation, tends to grow larger and 
larger each year, notwithstanding other general tendencies 
in an opposite direction, and notwithstanding the repeated 
fluctuations in the stock. Besides, there is a loss in weight 
and other elements of value, even in keeping a commodity 
which can be as easily preserved as wheat; so that the 
warehousing of large supplies causes consumption in that 
measure. 

The Street Supply of Stocks 

In the above discussion and throughout this essay, the 
wheat market has been frequently used as an illustration. 
Yet the conclusions arrived at are applicable to corn, pork, 
cotton, and several other agricultural commodities, and 
also to securities which are speculated in upon the ex- 
changes. The demand for commodities for speculative 
purposes contributed, while this country was growing and 
before manufacturing was well developed, to counteract 
other commercial tendencies; thus making a special de- 
mand for agricultural products, which at that time were 
particularly profitable, and when they were, in a more im- 
portant sense than at present, our natural products. 

The market for stocks also was greatly helped at the 
time by the speculative demand. In the development of 
this country which took place during the nineteenth cen- 
tury, the extraordinarily expensive operation was under- 
taken of transforming the transportation facilities from a 
system which required little capital to one in which a great 



86 VALUE OF ORGANIZED SPECULATION 

outlay was necessary. The railroads when first built sel- 
dom paid any net income. They were considered foolhardy 
enterprises at the time, because they sought to accomplish 
an object by untried means. They were foolhardy enter- 
prises from a cold-blooded investment standpoint, because 
no one, not even the wisest, could tell, till after years of 
trial, whether that particular method of transportation was 
really practicable, and because at the time there were not 
proper arrangements for conducting such corporations and 
systematizing them. The costly experiment of undertaking 
these things was paid for by speculators. 

In the history of most of our great transportation enter- 
prises some broad-minded and imaginative man has usu- 
ally figured as the original moving force. He, in his enter- 
prising spirit, has planned the road; he has put in some of 
his own capital, perhaps, and has induced conservative 
capitalists to take bonds. But as these great enterprises at 
the start are so hazardous, he could not find a sufficient 
number of broad-minded and imaginative men who were 
willing to run the risk of taking all of the common stock. 
The manner in which this stock was actually placed was 
for the promoters to go into the stock exchange and, by 
wash sales and otherwise, to induce speculation, and so 
create a purely speculative demand. 

There were not at that time large masses of capital 
seeking investment, and investors were cautious. But 
"Wall Street was just developing; it must have something to 
speculate with, and it took the stocks of the new enter- 
prises which others refused. The new securities became 
speculative favorites, and they constituted a large part of 
the street supply of stocks which circulated from hand to 
hand on the exchange in making deliveries. If these stocks 
had not been sold to Wall Street speculators at first, there 
would have been great delay in financing such undertak- 
ings, and our railroad system would have been many years 
behind its present development. For, let it be remembered, 



THE EFFECT UPON PRICES 87 

that, even in the enterprises which afterwards turned out 
to be good income producers, the investor usually lost 
what was first put in. 

It is not attempted here to justify practices which have 
made some of the worst pages of our financial history. It is 
merely pointed out that the first stage in the digestion of 
common stock has been its sale to adventuring speculators. 
Later, when an enterprise has passed through different 
receiverships and several reorganizations, when there has 
grown to be a demand for what it furnishes, when the man- 
agement of the corporation has improved and dividends 
have become regular; then the stock passes to the last stages 
of digestion, and, leaving the hands of speculators, is taken 
up by careful investors and business men. But it is specula- 
tors who supply the place of men of imagination and insight 
in first absorbing the stock, and it is also the speculators 
who try it out, and subject it to such buffetings upon the 
exchanges that the management is forced to improve and 
so give the stock a good value. 

Different Nations and Classes 

The effect of the frequent upturns in prices caused by 
speculation upon the exchanges is beneficial, as has been 
shown, to the people of this country, for our exports consist 
largely of agricultural products, the most important of which 
are speculated in upon the exchanges; and the stocks and 
securities used to finance our productive enterprises are 
also the subject of organized speculation. But not all 
classes of the people experience the benefit to an equal 
degree; and some of them, pending adjustments of prices to 
ever-changing conditions, are no doubt injured. The injury 
is not so great, however, as is ordinarily supposed, for the 
number of those who get their living directly from the soil 
is large; and, when agriculture is prosperous, our manufac- 
turers and other producers find their profits increased. 

If there be any classes that are not benefited by specu- 



88 VALUE OF ORGANIZED SPECULATION 

lative booms in agricultural products, they are such as 
depend upon fixed incomes from investments or upon salar- 
ies, fees, or wages. Considering first those who live upon 
the interest of money lent or from the income of stocks, 
bonds, or other securities, it should be noted that they are 
always anxious that agriculture be prosperous. To explain 
the reason, we might call to mind such years as 1894, 1895, 
or 1896. The price of food and other agricultural products 
was low in those years; and, as a result, the conditions that 
prevailed in our basic industry made the income precarious 
on investments which would otherwise have been profit- 
able. 

Taking the legal profession as an example of the fee- 
receiving classes, it might be noted that while there is much 
litigation even in bad times, yet, if others are prosperous, 
the lawyer can better collect his fees. Or, considering those 
who live upon salaries or wages, it may be admitted that 
wages have not risen as much as the cost of living; yet the 
reply frequently made must be considered, namely, that 
when business is active, there are fewer workers out of 
employment and there are a greater number of salaried 
positions. 

As regards different countries it may be noted that some 
of them have interests quite at variance with ours. Let us 
take England as an example. In that country manufactur- 
ing is more important than agriculture; and it is desirable 
from a British standpoint that manufactured articles be 
high in price. To the Englishman the speculative booms 
and corners in agricultural products, which are features of 
trading upon the exchanges, are not welcome. It is natural, 
therefore, that the English should look with dislike upon 
such speculators as Leiter and Hutchinson, and that Mr. 
Patten should have been mobbed upon the floor of the 
Manchester Cotton Exchange. 

As regards the question of the rate of profit and of inter- 
est, the conditions in England are quite different from ours. 



THE EFFECT UPON PRICES 89 

The English have a surplus of capital which they are con- 
tinually investing in other countries. Desiring, then, as they 
do, a high investment yield, they naturally seek low prices 
for bonds, stocks, and securities; and nothing can exceed 
the disgust of the English financial writers and authorities 
when they discuss the great speculative booms so often seen 
upon the New York Stock Exchange. 

There are very few countries whose interests are similar 
to England's in this respect; and most nations are benefited 
by speculative booms, whether they occur in the raw ma- 
terials usually speculated in upon the commodity exchanges 
or in the securities used in advancing productive enter- 
prises. Nevertheless, it must be admitted that the organiza- 
tion of speculation does not affect all nations in precisely 
the same way; and that, despite the economic compensa- 
tions and adjustments, all classes of the people are not 
equally benefited. 

Cotton Exchanges 

In order that speculation may be fully organized, it is 
necessary that the article traded in be representative — 
that is to say, it must be capable of being designated in a 
uniform manner. Furthermore, it is highly advantageous 
in the interest of fairness that the sources from which the 
commodities or securities may be got, should, so far as pos- 
sible, be matters of common knowledge, and that the field 
from which they may be procured should be a wide one. 

More than one well-known corner in Erie is brought to 
mind in this connection. In the case of the corner in that 
stock which occurred in 1866, the speculator whom some 
were attempting to squeeze was also treasurer of the com- 
pany, and he had lent money to the Erie on the security of 
certain of its bonds which were convertible into stock. But 
this latter fact was not generally known on the street. 
Accordingly, after inducing the bulls to make extensive 
purchases, the holder of the bonds converted them into 



90 VALUE OF ORGANIZED SPECULATION 

stock and made delivery on his sales, thus causing a terrible 
break with great losses to those who were caught long. 
Such practices are usually considered more as tricks than 
as legitimate commercial transactions; and, in recent years, 
traders have looked carefully in carrying on operations to 
any possibility of converting bonds into stock in the man- 
ner described. 

The difficulty of providing adequate rules which will con- 
trol the deliveries is not great, however, in the case of stock 
exchanges, since securities are homogeneous and readily 
divisible; and it is only by some slip of the law, as in the 
illustration just referred to, that there can be any uncer- 
tainty. Yet there are many cases where the dealers in com- 
modities would like the help of organized speculation in 
carrying them; but they cannot get this owing to the fact 
that there is not enough of the commodity of a particular 
grade to make the necessary deliveries and to avoid the 
danger of frequent corners. To remedy this difficulty it has 
been provided in some exchanges that, if the seller wishes, 
he may deliver a better grade than the one on which the con- 
tract is based, or he may deliver an inferior grade with a 
penalty which is supposed to cover the difference between 
its value and that of the higher grade, thus widening the 
field of possible deliveries. 

Upon cotton exchanges this question of varying grades 
has caused much trouble. Widely extended rains, for in- 
stance, at a critical period in the season may lower the 
grade of a large part of the crop. Hence, in different years, 
the amount of a grade which can pass into consumption 
and be delivered on contracts will greatly vary; and it is 
particularly necessary to provide for substitution of grades 
in making deliveries. There is nothing in the least repre- 
hensible per se in providing for this necessary substitution; 
for it is plain that, if only one grade be deliverable on con- 
tracts, the liability to corners is greater than if several 
grades are so deliverable. 



THE EFFECT UPON PRICES 91 

In order thus to widen the field of possible deliveries, an 
ingenious system has been provided by means of which 
the price of a future may be based upon a particular grade; 
but other grades may be substituted in making deliveries, 
with an allowance which is intended to make the substitu- 
tion equitable. At the New Orleans Cotton Exchange the 
basis is middling cotton; but other grades may be delivered 
on contracts at certain differences, which are changed by a 
committee to conform to the daily fluctuations of the dif- 
ferent grades in the spot market. The New York Cotton 
Exchange employs a similar system, except that the differ- 
ences are not revised as often as at New Orleans. 

The length of time that elapses between the different 
revisions is of the greatest importance, however, and the 
New York Cotton Exchange has been criticized because its 
revisions are not more frequent. 1 It is argued that condi- 
tions may change after the differences between the grades 
have been fixed, so that a grade may be over-valued, or the 
reverse. The result of such a false valuation might be that 
a considerable margin of difference would arise between the 
spot price of middling cotton and the price for contracts. 
Hence, it is reasoned that by an economic process some- 
what similar to Gresham's Law, the over-valued grades 
establish the price at which the contracts are sold; and, 
between the revisions, a system analogous to the alterna- 
tive process of bimetalism results. Consequently, the price 
of the future, which ostensibly represents the price of the 
grade on which it is based, may be at a discount from the 
price of such grade. 

The charge has therefore been made that this method of 
adjusting differences tends to depress prices. The reason 
assigned is that the system of handling cotton is based 
upon the prices for futures; and dealers at outside points, 
in making bids to producers for their cotton, do not in all 

1 Cf. Commissioner of Corporations, Report on Cotton Exchanges, 
passim. 



92 VALUE OF ORGANIZED SPECULATION 

cases understand why it is that futures are depressed. 
Therefore considerable time may elapse, and much cotton 
change hands at inequitable prices, before the proper ratio 
is again established. 

The officers and members of the New York Cotton Ex- 
change, however, do not take the pessimistic view of their 
system just stated; and while it is admitted that there 
should be revision of differences, it is nevertheless held 
that the contracts should be calculable ones, and that 
a great frequency of revision makes an unnecessary uncer- 
tainty in regard to what a purchaser is to get when the 
cotton is delivered to him. Still, in order to avail itself if 
possible of the best that is in the different systems, the 
New York Cotton Exchange has amended its by-laws so 
that the revision committee will revise the differences three 
times instead of twice a year as formerly ; and there is a 
disposition to await the result of the enforcement of the 
new rules. 

In the meantime it should be remembered that the 
special difficulties to be overcome in a particular case, while 
they may cause modification of rules of action, should not 
be the ground for sweeping changes. The cotton exchanges 
are obliged to meet a difficult situation, such as does not 
exist in other exchanges; and it will require further time 
before all parties are agreed as to the best method of adjust- 
ing the controverted matters. The abuses which may grow 
up in a particular line of trade should not be confounded 
with the principles of organized speculation itself. 

Summary of the Upward Tendencies 

As a result of the conditions described, commodities that 
are the subject of organized speculation can be kept, and 
usually are kept, above their export or consumption value a 
part of the time each year. It is admitted that contracts 
entered into to deliver in the future constitute the supply 
of such contracts, and it is further admitted that contracts 



THE EFFECT UPON PRICES 93 

to deliver enormous quantities are so entered into upon the 
exchanges. But after conceding the above, the attention 
of the reader was called to the fact that speculators are 
naturally bullish, and that the demand made by them for 
contracts is far greater than the supply that they bring into 
existence. And, inasmuch as the prices of the actual com- 
modity sympathize with the prices of contracts, the princi- 
pal reason why organized speculation has a strong tendency 
to put up prices is made apparent. Any manipulation, too, 
would naturally be so conducted as to take advantage of 
this prejudice of speculators for the buying side, since it is 
easier for the market leaders to utilize prejudices which 
already exist than to create new ones. 

This enormous net demand made by buyers upon the 
speculative markets is increased by the fact that sellers 
must make some deliveries, and that the numerous corners 
and squeezes and fears of the same cause the shorts to 
make purchases of the actual commodity and place it in 
store where it may be used for delivery, and that a certain 
amount is thus held from augmenting the supply of the 
actual commodity for consumption. Furthermore, the 
short contract is one which makes a trader who enters into 
it exceedingly nervous and apprehensive, and the shorts 
are always taking alarm and bidding up prices. These fre- 
quent alarms with covering of shorts cause most of the 
numerous sharp rises upon the exchanges; and occasionally, 
the bullish manipulation becomes so rampant that the 
shorts are forced to cover at considerable loss in a squeeze 
or corner. 

It is also to the interest of brokers that prices be moving 
upward, as advancing markets mean large trading and spec- 
ulation with numerous commissions; and their circulars, 
personal solicitation, and advice help to increase the specu- 
lative excitement and advances in price. Any tendency to 
artificial prices should be deprecated; nevertheless, it may 
be noted that speculation in agricultural products has 



94 VALUE OF ORGANIZED SPECULATION 

served to make a demand for the same and has given higher 
prices for commodities which could be produced to advant- 
age in this country. Furthermore, the stock exchanges have 
helped greatly in financing the construction of our railroads 
and other industrial enterprises, as they have not only re- 
duced the cost of marketing, but have also enabled promo- 
ters to place the stocks at good prices upon the exchange. 

The Complication of Prices — A General View 

As stated when the discussion of the price tendencies en- 
gendered by organized speculation was begun, there are 
three such tendencies which are more important than 
others and these have consequently been selected for par- 
ticular description and comment. These tendencies, how- 
ever, shade into one another so imperceptibly that it is dif- 
ficult to summarize or define them. Though one or another 
of the numerous factors may assume such importance as to 
be called, for the time, the predominating one, yet the situ- 
ation is continually shifting in such a way as to render it 
impossible to make any accurate description by the easy 
method of using set rules and sweeping statements. The 
only method possible is the one here followed — to describe 
the action of the principal factors separately, remember- 
ing that the combinations that present themselves are in- 
finite in their number and variety. 

Perhaps the complexity of price-making may best be 
illustrated by a comparison to the ocean and the law and 
lack of law which govern its movements. The ocean has its 
currents, which follow their course notwithstanding the 
disturbing influences which always assert themselves. Any 
given portion, as a cubic yard, is acted upon by different 
forces at the same time. The cubic yard, taken as an illus- 
tration, may form part of the water in a great current which 
can be charted and will always follow its regular course; 
but this portion of the water, while moving in the current 
can be affected by forces which are irregular in their 



THE EFFECT UPON PRICES 95 

action, such as those causing the waves and minor move- 
ments. Furthermore, there are tides which elevate a part 
of the mass of the ocean and then allow it to fall back to the 
general level. 

There are many movements other than the three just 
mentioned observable in large bodies of water, and we can 
scarcely conceive of the complexity of the results of the 
various forces involved. But the factors to be observed 
upon a speculative exchange are fully as numerous and 
complicated as those to be seen in the ever-changing ocean. 
In the same way that a particular quantity of water in the 
ocean is acted upon by different forces at the same time, so 
it is with prices in the economic field. They are the result 
of many forces simultaneously acting in quite different 
directions. 

The currents of the ocean which serve to adjust its mass 
to important underlying conditions may be compared to 
the movements of prices described above, in which, by the 
action of organized speculation, the wide variations in value 
seen outside the exchanges are avoided. 

The waves upon the surface of the ocean can be com- 
pared to the numerous minor movements of prices due to 
exchange trading, which disturb the course of trade super- 
ficially, but have little effect upon its deeper movements. 

The tides, which at certain times elevate part of the sur- 
face of the ocean, can be compared to that tendency in ex- 
change markets which elevates the prices of commodities 
and securities above the level that they would otherwise 
seek. 

The illustrations are given because there are those who 
find it difficult to understand how it is that prices can have 
a tendency upward and one downward at the same time, 
and how it is that a certain commodity can be in the midst 
of a bull movement which may last for years, and yet be 
subject to downward fluctuations from causes which lie only 
on the surface. 



96 VALUE OF ORGANIZED SPECULATION 

If the bull and bear tendencies which exert themselves 
at a particular time were capable of being reduced to fig- 
ures which could be put upon the pages of a ledger, the bull 
agencies being put upon the credit side, let us say, and the 
bear agencies upon the debit side, and if the net resultant 
of the bull and bear agencies could be ascertained by strik- 
ing a balance in the same way as from a ledger, then the 
manner in which the different opposing forces act could be 
readily understood. It is because of the common assump- 
tion that there can be only one economic factor which af- 
fects prices that the general misconception arises. 

Summary of the Three-Price Tendencies 

The actions of traders upon an exchange are the reflec- 
tion of their psychological state, and therefore their weak- 
nesses and foibles must be frankly recognized. Frequently 
they are rash, but at other times -timid. Now they are 
rushing in with all the assurance of amateurs; now they are 
running with terror because of some bogey set up to frighten 
them. Their fickle nature is thus seen in the fact that they 
are always causing the eccentric minor fluctuations which 
are characteristic of the exchange markets. 

The hopefulness of traders is shown in the tendency of 
the market to rise whenever any excuse can be given for a 
bull movement; while the fact that sound common sense 
and an accurate summing-up of values govern those who, 
by the law of the survival of the fittest, control prices in the 
long run, is seen when we realize that exchange trading, in- 
stead of causing wide movements of price, tends, quite to 
the contrary, to keep the market within bounds. 

There are many fallacies which frequently occur in the 
discussion of the effect of exchange trading upon prices; 
and in the next chapter the principal ones will be consid- 
ered, especially the widely prevailing and unfortunate fal- 
lacy that short selling tends to put prices down. 



CHAPTER III 

prices (continued) — some fallacies considered 

In order to arrive at a correct estimate of the value of or- 
ganized speculation, it seemed necessary to review in some 
detail the principal tendencies which make toward advanc- 
ing prices and which would result in an indefinite advance 
if it were not for the factors previously enumerated which 
keep the market within bounds. 

It is to be regretted that this question is seldom dis- 
cussed from the standpoint of the moral and social welfare 
of the community, but that the arguments used pro and 
con usually refer to the effects upon prices. It is further to 
be regretted that the arguments upon the effects of such 
speculation are but too frequently the mere offhand de- 
clarations of persons who have given the subject the most 
insufficient study. At times of declining prices the anti- 
optionist is full of assurance in attributing all declines to 
the action of organized speculation; and in his breezy man- 
ner, he even attributes the declines in the prices of com- 
modities not traded in on the speculative markets to the 
same cause. But his opponents have an arsenal of facts 
behind them, and often get the ear of the public when they 
show the tendency of all exchanges to manipulate prices 
upward. 

When commodities are advancing in price, however, the 
anti-optionists have an easier task. In such case they 
quickly shift their ground, and stoutly maintain, for the 
time at least, that organized speculation tends to put up 
prices. To prove this, they have only to refer to the numer- 
ous speculative booms with occasional corners and squeezes 
of the shorts as recorded in the newspapers, events which 



98 VALUE OF ORGANIZED SPECULATION 

naturally strike the popular imagination. In 1909 a news- 
paper controversy took place between Secretary of Agri- 
culture Wilson and James A. Patten, of the Chicago Board 
of Trade, in which Mr. Patten was accused of manipulating 
prices upward. To this charge he retorted that he merely 
acted in board of trade operations as any merchant who 
anticipates price movements of any commodity by buy- 
ing when prices are low and selling when they are high. 
While expressing no opinions as to the merits of this parti- 
cular controversy, it is brought to mind merely to show how 
the exchange trader is called upon first to answer to the 
charge that he is putting prices down and then that he is 
putting them up. 

As regards securities, their owners are of course anxious 
that they should advance in price, and the promoters and 
manipulators are especially glad to see high values for the 
securities that they are selling. It is to the interest of in- 
tending investors, however, that stocks fall to such a figure 
that they will pay a good income upon the market price. 
But a trader who thinks well of stocks is only too likely to 
invest all the quicker if they are advancing, and then he 
joins the ranks of those who are working for higher prices. 
Thus the interests of the financiers who float stocks are so 
apparent, their holdings awaiting digestion are so well 
known, and they are so prominent as leaders of the stock 
market, that even sophists seldom accuse them of seeking a 
decline. 

But speculative commodities are not usually produced by 
leaders of the market. On the contrary, they are, with few 
exceptions, agricultural products; and, to the farmers who 
grow these crops, the distant exchange in the city may 
easily appear as the cause of any unsatisfactory prices 
that he receives. This jealousy and misunderstanding of 
the farmer is augmented by other jealousies in different 
elements of the business community; for, as explained else- 
where in this essay under the heading of " Monopoly," the 



PRICES — SOME FALLACIES CONSIDERED 99 

speculative element upon the exchanges is different from 
the controlling interests in the world of general trade and 
industry. These ill-mated commercial forces appear to 
work in harmony, it is true, but their cooperation is ficti- 
tious and more apparent than real. The speculative ex- 
changes in their present imperfect state seem to bring for- 
ward their most repulsive aspects ; while only the attentive 
student of economics can see their beneficent effects upon 
commerce, or the great good to the community which they 
are likely to accomplish in the process of evolution. 

Hence it is that practical men look askance upon spec- 
ulation on the exchanges, and all interests are ready to 
make it the scapegoat for any movement of prices which is 
not satisfactory. It so happens that, among the laity, and 
even to some extent among professional economists, the 
idea that high prices are good of themselves widely prevails ; 
and it is therefore quite natural that the exchanges should 
be called upon to bear the brunt of the adverse criticism 
for declines in price. Even those who would benefit by 
lower prices are quite ready to cater to popular prejudice 
and accuse organized speculation of depressing values; 
while politicians see few votes that can come from brokers 
or their employees and many that come from those who 
do not understand exchange operations. 

In the first part of the decade beginning with 1890, these 
different interests undertook a legislative campaign against 
organized speculation which was based almost entirely upon 
the alleged tendency of exchange dealings to lower prices. 
The different proposed laws introduced into Congress were 
principally directed towards curtailing short selling, as it 
was thought that this practice was the cause of the low 
prices that prevailed at the time. Also, in more recent 
years, similar legislation has been sought, directed in most 
cases against speculation in cotton. In the printed reports 
of hearings before different committees in regard to the 
proposed legislative measures, there can be found perhaps 



100 VALUE OF ORGANIZED SPECULATION 

more fallacies than in any other collection of economic 
writings. There appeared before the committees men who 
knew how to grow crops, to mill wheat, to spin cotton, and 
to pack pork, but who knew nothing of commerce in its 
broader sense or of the general conditions that make prices. 

The Underlying Fallacy 

The fallacy, which underlies most of the arguments 
of those who hold that organized speculation puts down 
prices, arises from fixing the attention upon the short seller 
and his sales, at the same time forgetting or minimizing the 
fact that the net tendency of the exchanges is to encourage 
buying and thus to furnish a speculative demand. The 
bear is seen offering to sell a commodity for future delivery; 
and his offerings appear, for the present, at least, to be as 
potent as a supply of the actual commodity; but the specu- 
lative buyer is not seen, as he bids for even greater quanti- 
ties of "wind," which demand more than counterbalances 
the offerings of the short seller. 

It would seem as though every form of human ingenuity 
were exhausted in the effort to prove that the seller has 
more effect upon the market than the purchaser. For in- 
stance, it is said that, when a short seller of wheat buys it 
in, such a purchase does not have as much effect as the orig- 
inal sale, because the purchase is usually made from some 
other short seller. But this argument is clearly a fallacy, and 
could just as well be applied to the long side of the market. 
Thus it could be said, when the long buyer sold out his con- 
tract, that in many cases he would be merely selling to an- 
other purchaser of a long contract. If the same species of 
reasoning were resorted to as in the other case, the supply 
which leads to this sale would appear to have no effect. 
Arguments, however, should be such that they will work 
either way. 

Probably it is due to the idiom of our speech that there is 
so much fallacious writing and thinking upon this subject. 



PRICES — SOME FALLACIES CONSIDERED 101 

When a trade is effected in which one dealer buys a com- 
modity which another sells to him, the transaction is called 
a purchase, if viewed from the standpoint of the buyer, or 
a sale, if viewed from the standpoint of the seller. And 
transactions upon a commercial exchange are referred to as 
"sales," perhaps because such an exchange is considered 
as a place to market or sell commodities. If it were our cus- 
tom to say, for instance, that there were transactions in so 
many bushels of grain upon the board in such and such a 
time, many fallacies would be avoided. But in common 
speech the word transaction is not used in the above con- 
nection; for, if one trader bought, and another sold, a mil- 
lion bushels, the common way of narrating the occurrence 
would be to say that there was "a sale" of a million bushels, 
thus fixing upon the mind the idea that this grain was sold 
and ignoring the fact that it was also bought. 

The business man knows business, because it is to prob- 
lems in the field of trade that he devotes himself; and, for 
the same reason, he does not usually understand the nice- 
ties of language. Hence it is quite possible, by fixing his 
attention upon the sale side of a bargain, to convey the im- 
pression that a sale does not necessarily imply a purchase. 
This obliquity, due to lack of scientific training in the con- 
sideration of economic problems and to lack of practice in 
writing and speaking on such subjects, leads to fallacies in 
different departments of economics, particularly in discuss- 
ing the tariff, but also in considering this question of trans- 
actions upon commercial exchanges. Hence we find it 
stated over and over again, in the different writings upon 
the subject, that sales depress prices; that so much of a 
commodity has been sold upon an exchange, and hence, 
so some of the writers say, any one with common sense can 
see that these sales must have their depressing effect. 

It might be that buyers were bidding desperately in the 
midst of a corner; it might be that enormous quantities 
were being eagerly bought in response to exaggerated news 



102 VALUE OF ORGANIZED SPECULATION 

sent out by speculators, and that excitement had been 
worked to a tremendous pitch of recklessness by the 
methods of the speculative exchanges; yet those persons 
who fall a victim to the above-mentioned peculiarity of lan- 
guage would refer to these transactions, in which the eager- 
ness of the buyers is so conspicuous, as so many "sales" of 
the commodity, which, so they reason, will depress the 
price. 

It is not meant herein to imply that either the purchase 
or the sale is of itself the determining factor. On the con- 
trary, it is the demand which leads up to the purchase and 
the supply that leads to the sale which cause fluctuations 
in price. The actual purchase and sale, or in other words 
the transaction, is but the seal which is put upon the condi- 
tion of the minds of buyers and sellers at a particular mo- 
ment, showing that the demand represented by a buyer 
and the supply represented by a seller have been merged in 
a transaction. The movements of prices are to be deter- 
mined by analyzing the effect of demand and supply in the 
different circumstances found, not by considering the sell- 
ing side only and then calling a transaction a sale. 

Selling Four Times 

The writer who perhaps has carried to the farthest limit 
the idea that a sale does not imply a purchase is Charles W. 
Smith, of Liverpool, England. In most respects he agrees 
with others who attack future selling; but his favorite doc- 
trine appears to be that, under the future system, the crop 
is sold four times. Perhaps an excerpt from his writings will 
best illustrate how it is that the anti-optionists continually 
ignore the fact that purchases may be made of future con- 
tracts as well as sales. In discussing the possible introduc- 
tion of the future system into the market for fruit, Mr. 
Smith says: "Instead of one crop of fruit being sold or fore- 
stalled, there would be four crops of fruit made out of the 
one. For example — first, the actual crop would be fore- 



PRICES — SOME FALLACIES CONSIDERED 103 

stalled by the sale of a Future to a speculator; secondly, 
there would be the resale of this Future; thirdly, there 
would be the unlimited crop sold by bears, etc.; fourthly, 
there would be the actual crop itself sold to the consumer." 1 

But Mr. Smith might just as well have called attention 
to the fact that some parcels of a commodity traded in upon 
the exchanges are sold hundreds of times. If one wishes to 
avoid fallacy in this respect he has but to remember that, 
for every time a commodity is sold, it has also been bought. 
Thus, in the case supposed in the excerpt, when the pro- 
ducer sells his crop in advance to a speculator, the crop is 
bought at the same time that it is sold, and this purchase 
may be on terms very favorable to the seller. For, when a 
purchaser buys in advance in this way, he does it, in many 
cases, because he is anxious to obtain a supply; and, when 
he buys under such pressure, an excellent price is often ex- 
acted. In the second transaction, when the speculator 
closes his future contract, this sale would have no more 
effect than his former purchase; and, under the future sys- 
tem, there is great buying power, in that speculators are 
always entering the market and frequently are ready to re- 
lieve any tired trader of his load. As regards the third sale, 
"the unlimited crop sold by bears," there is to set against 
it the "unlimited" crop purchased by the bulls on future 
contracts. The fourth sale, where the actual crop is sold 
to a consumer, would need to be made in any case; and, 
when it is made, there will necessarily be a purchase of the 
same. 

The important question is : Does the introduction of the 
system of organized speculation add to the efficient demand 
or does it add to the efficient supply? The only answer 
that can be given is that both are enormously increased. 
The contracts manufactured upon the speculative ex- 
changes have much the same effect as an increase in the 
supply of the actual commodity, inasmuch as spot prices 
1 Smith, Commercial Gambling, p. 131. 



104 VALUE OF ORGANIZED SPECULATION 

tend to follow the price of contracts. But the demand for 
these manufactured contracts comes largely from ex- 
change traders and is equally efficient in affecting the 
price of the cash commodity. Hence the problem assumes 
the form of comparing the relative strength of the two con- 
flicting determinants. Having brought the discussion to 
this point, there is one overshadowing consideration to be 
kept in mind: "The public are always bulls." This state- 
ment of the attitude of the great mass of speculators is only 
slightly exaggerated, and is admitted and emphasized by all 
market students. This enormous demand of the public is 
attracted to the speculative markets by the machinery of 
organized speculation; and it constitutes a buying power 
which even the great market leaders find it more profitable 
to encourage than to oppose. 

The Offers to sell 

There are many different ways of stating and varying the 
argument; frequently the anti-optionists argue that it is 
not so much the amount of sales actually made as it is the 
offers to sell which affect prices; further, they say that the 
offers are limitless and that it requires little or no capital to 
make them. It is difficult, however, for any one who keeps 
his head in such a controversy to understand how offers to 
sell can be made any more readily than bids for the pro- 
perty. 

If the observer stands near the wheat pit, he will hear 
numerous offers to sell, so numerous that they appear al- 
most illimitable; and the offers which are not accepted are 
much more numerous than those which issue in a contract. 
But, on the other hand, a listener will hear many bids, 
which are just as numerous on the average as the offers to 
sell. It should be remembered, of course, that purchases 
may be made upon the margin system as well as sales, and 
a given amount of money goes just as far in margining a 
buyer of futures as it does a seller; and the intending buyer 



PRICES — SOME FALLACIES CONSIDERED 105 

has equal facilities for making numerous bids, which may 
affect the market just as powerfully as the offers to sell. 

Philanthropy 

Another argument, frequently made to prove that there 
is some way by which the short sellers can get out of their 
contracts without making a demand for the commodity, is 
that it is imposssible for them to buy enough of it to make 
deliveries upon the enormous amount of short contracts 
open, and hence the buyer allows them to settle at a low 
price. If the disposition of the long holders of contracts 
were as above stated, the conclusion would readily follow. 
But, like many another false argument, the premises are 
wrong; and the fact that a philanthropic disposition is at- 
tributed to the long holders shows an utter failure to under- 
stand human nature as exhibited on a speculative exchange. 

The speculators upon the Chicago market, and on other 
markets, are made of sterner stuff. Instead of making an 
easy settlement with a trader who cannot fulfill his con- 
tracts, their settlements are hard, indeed; and, furthermore, 
they use every means in their power to make delivery diffi- 
cult if not impossible. This effort is one cause of the numer- 
ous corners and squeezes. If manipulators are attempting a 
corner in wheat, for example, they will send men into the 
country to buy all that they can from the farmers who own 
grades that might possibly be delivered. They will then 
send this wheat out of the country or fill the elevators with 
it; and while they are doing everything that they can to 
make the performance of the contracts by the bears im- 
possible, they will bid for the wheat in the pit in the effort 
further to raise the price. Why would they do these things 
if they were willing to let the bears settle on favorable 
terms? The spirit with which they act is of just the oppo- 
site nature. Their effort is to corner or squeeze the bears, 
and they have no mercy. 

It is true that when a trader finds himself cornered and 



106 VALUE OF ORGANIZED SPECULATION 

knows that there will be much expense in getting the wheat 
to make delivery, he will go to the cornerer and ask for a 
settlement. This will usually be granted, not through phil- 
anthropy or pity; but because the cornerer does not want 
to make himself unpopular with his fellow members, and 
because he does not wish to make the price of the commo- 
dity so high that the most extraordinary efforts will be 
made to bring it in, and also because — especially in 
recent years — there have been rules adopted on the 
exchanges which render corners and manipulations more 
difficult. Yet even this settlement is granted in about the 
same spirit with which a successful gambler gives a victim 
enough money to take him home. It is not done because it 
is impossible to make delivery, but for quite different rea- 
sons; principal among which is the fear that, if settlement 
be not made, the commodity will be brought in from the 
country or from other cities. Of course, in case of a corner, 
the farmers do often sell at high prices ; but that is not what 
the cornerer desires, and he prevents it whenever he can. 

In some instances, however, when the situation appears 
to be well in hand, he will refuse to settle. A corner in corn, 
which occurred some years ago, is called to mind in which 
the cornerers said to those who wished to settle, " Go into 
the pit and buy the corn. We are not running this deal 
through philanthropy." The spirit with which the trader 
does business is much the same in the case just given as in 
the case where he permits his victim to settle. The cornerer 
simply wishes to get the price of the commodity just high 
enough so that the belated short will buy of him, and yet 
not high enough to warrant the trouble and expense of 
going to others to get the commodity. 

When a trade is canceled by the process of ringing out, 
as it is called, or through any clearing-house or settlement 
system, it is an evidence, not that the closing of a trade is 
impossible, but that the cornerer knows that it is possible 
to do it otherwise. For, if he could prevent others from 



PRICES — SOME FALLACIES CONSIDERED 107 

selling the commodity, and if he were not ready to sell it 
himself, he would let those who are being cornered keep on 
bidding in the pit, so that the price would be raised higher 
and higher, which is exactly what the cornerer wishes. 

The Payment of Differences 

In connection with the fallacy just discussed, another is 
frequently heard, to the effect that when a contract to buy 
and one to sell are set off against each other and settled by 
the payment of differences, the purchase contract in such 
a case has no effect in raising price. The most sensational 
conclusions are reached by this species of reasoning. It is 
said, for example, that millions of bushels of wheat are 
thrown on the market greatly depressing the price; that 
this wheat is never bought back, as it is settled by the pay- 
ment of differences ; and that therefore the idea that every 
sale implies a purchase is negatived. 

The answer to such an argument is, that, in the case sup- 
posed, there is obviously important pressure to buy, and 
that the amount paid is in effect the difference between the 
previous sale and a present unfavorable purchase. If per- 
sistent demand be thus settled, it can hardly be said that 
it has no effect. When a short sale has reached the books 
of a clearing-house which clears commodities, however, 
there is no way to get it canceled except to make delivery 
or else set it off against a purchase. But to argue that the 
purchase in such a case has no effect is about as absurd as it 
would be to say that a credit of a certain amount on a 
ledger has no effect because perchance the account may bal- 
ance. If some method be found whereby a purchase can be 
checked off against a sale, then these two opposing tenden- 
cies counterbalance each other. The book-keeping opera- 
tion has no effect either way, except that a demand for a 
certain amount, and the supply for a certain amount, have 
been taken off the market. 

Referring to accountancy, let us consider a slightly dif- 



108 VALUE OF ORGANIZED SPECULATION 

ferent example from that given above. Let us suppose a 
customer is charged $10 on a ledger and afterwards pays 
$10 in cash. The account is now in balance and the book- 
keeper rules it up. Would it not be absurd for the cus- 
tomer to undertake then to argue that the $10 he paid had 
no effect because it only went to counterbalance the pre- 
vious charge of $10? Or, supposing that a pound of flour 
is on one side of a scale and a pound weight on the other 
side, would it not be absurd to argue that the gravity of the 
flour had no effect because the scales were in balance? It 
is the same in a market where a demand for a certain 
amount and a supply for a like amount are set off against 
each other by a system of accounts. Each has its effect. 
The supply is diminished, and the demand is diminished, 
in like degree. 

The Interest of the Parties 

The commitments of the different traders in the market 
are of course important in determining on which side their 
influence is to be cast. A trader who is long will naturally 
give out bullish opinions; and, if his interest be large 
enough, he will sometimes go to much expense in order to 
spread news which favors higher prices. In the same 
way, a bear, who has committed himself to the short side, 
will naturally do all that he can to depress values. These 
facts are called to mind by the anti-optionists; and they also 
point out that the modern system of organized speculation 
provides a plan whereby a trader may have a direct inter- 
est in depressing prices. 

But the important consideration in this connection is, 
that it is impossible to provide opportunities for the large 
number of purchasers brought into the market by organ- 
ized speculation unless they be supplied by traders who sell 
for future delivery. Estimates are repeatedly being made 
by different parties showing the large proportion of the 
deals in organized markets which are of a purely specula- 



PRICES — SOME FALLACIES CONSIDERED 109 

tive character. If, then, the buyers brought in by organ- 
ized speculation were confined to those traders who had 
the actual commodity to sell, they could not make their 
purchases. The comparatively small amount of the actual 
commodity coming upon the market would be quickly ab- 
sorbed, leaving the great mass of intending purchasers to 
bid higher and higher in the effort to tempt those who had 
bought earlier to part with their holdings. 

A market of this sort would doubtless be highly satisfac- 
tory to the producer, except for the fact that the state of 
affairs contemplated could be only temporary. As shown 
heretofore, purchases made purely for speculation must be 
unloaded at some time, and speculators are likely to tire of 
their holdings very soon. When they do, the effect of their 
sales would put the price to the opposite extreme — even 
to a point below the use-value of the property. Hence if 
short sales in wheat, for instance, were abolished, the result 
could be none other than that trading in that commodity 
would be controlled by much the same economic laws that 
govern real estate dealings at present. That is to say, the 
wheat market would be one in which there would be an 
occasional tremendous boom, perhaps once in fifteen or 
twenty years, and each boom would soon be followed by a 
terrible fall. After each decline would ensue a long period 
of dull markets mixed with abrupt or eccentric fluctuations. 
But there could not be another extensive bull movement 
until, as the real estate men would express it, "another 
crop of fools were born." 

In order that speculation may be popular and continu- 
ous, the market must be made broad enough so that there 
is opportunity for a great number of traders on both sides. 
Organized speculation introduces this great mass of trad- 
ing, and it overshadows the comparatively small trade in 
the actual commodities. As an illustration, let us suppose 
a market to which an average amount of 50,000,000 
bushels of actual wheat is brought every year and sold to 



110 VALUE OF ORGANIZED SPECULATION 

consumers. Let us further suppose that organized specula- 
tion be introduced into this market with the vast horde of 
traders that go with it. Also, let us make the supposition — 
which is entirely reasonable — that they furnish a demand 
for 500,000,000 bushels for purely speculative purposes. 
But ex hypothesi there will be only 50,000,000 bushels 
which reach that particular market in the whole year. 
How, then, are these prospective purchasers to be accom- 
modated? They would quickly buy the 50,000,000 of actual 
wheat at an advanced price, and then they would bid for 
450,000,000 more at a further advance, leaving those who 
ordinarily purchase the 50,000,000 bushels for actual use to 
pay either a higher price or seek some other market. 

It is readily seen from this illustration that there is no 
way to accommodate these speculative buyers of 500,000,- 
000 bushels of wheat, except by a boom similar to those 
which occur about once in a generation in the real estate 
market, or else by providing a system whereby this im- 
mense demand may be satisfied by sales of short wheat. 
Supposing the latter solution of the difficulty to be the one 
selected, let us note its exact effects. The plan adopted has 
been simply to introduce organized speculation. The de- 
mand and supply for the 50,000,000 bushels of actual wheat 
in this market is not affected except indirectly; but the 
demand for about 500,000,000 bushels of future wheat has 
been satisfied by a supply of approximately the same 
amount. 

It is not meant to argue that there would be transactions 
for exactly the amount mentioned or that the prospective 
buyers would exactly equal the prospective sellers. It is 
merely intended to make the supposition consistent with 
the probabilities, by assuming that, at the prices which 
would be likely to prevail, there would be buyers for 
500,000,000 bushels of future wheat who would be satisfied 
by sales of an equal amount of short contracts. Or, the 
supposition is, to use a legal phrase, that the price would be 



PRICES — SOME FALLACIES CONSIDERED 111 

such that the minds of the buyers of 500,000,000 bushels 
and of the sellers of the same amount would meet; and 
hence the clearing-house would show that there were 
500,000,000 bushels of the short wheat and the same 
amount of long contracts. 

The illustration given should show the reader what 
organized speculation will do in such a case as that sup- 
posed. It has raised up buyers for 500,000,000 bushels of 
future wheat and sellers for the same amount; and we are 
now ready to consider the question of the interests which it 
has created. The anti-optionist can see the bearish interests 
of those who have sold short in the case supposed, but he 
cannot see the bullish interest of the buyers of the future 
wheat. Yet the bull element introduced by organized 
speculation is even more important than the bear element 
so introduced. This is because speculators are naturally 
bullish, and more of them seek to buy for long account than 
to sell short. This added net demand cannot be satisfied 
except by a greater or less rise in prices. As before ex- 
plained, a rise due to a speculative demand of this charac- 
ter will be only a temporary one. Yet the tendency is ever 
present, and enables the producer to get higher prices part 
of the time than he would in case speculation were not so 
rife. 

At the time when deals are consummated for future de- 
livery, the amount of futures purchased must be exactly 
equal to the amount of futures sold, as the actual commod- 
ity does not figure till the time for delivery arrives. Thus, 
in the case supposed above, the demand for the 50,000,000 
bushels of actual wheat and the supply of the same amount 
are not affected by the introduction of organized specula- 
tion, except indirectly as prices may be changed thereby. 
But as regards future wheat, the interest in depressing 
prices of the sellers of 500,000,000 bushels of short wheat 
only counterbalances the interest of the buyers of the same 
in putting up the price of the 500,000,000 bushels of long 



112 VALUE OF ORGANIZED SPECULATION 

futures; and it is a rank fallacy to suppose that, while the 
sellers of a certain amount are interested in a fall, the trad- 
ers who bought of them are not equally interested in a rise. 

The Strength of the Parties 

Arguing further, the anti-optionists call to mind the fact 
that, while the public are usually bulls, the professionals are 
more likely to be bears. Starting with these premises, they 
argue, and with much reason, that the bear side has greater 
skill in professional manipulation behind it. This argument 
is no doubt the most effective one which can be offered in 
support of the doctrine that organized speculation de- 
presses prices. Perhaps the easiest way to answer it is to 
refer to the comparison heretofore made between profes- 
sionals making profits from amateurs in the speculative 
markets and the contest between the drover and the lambs 
he is driving. It would not be wise in the drover to attempt 
to control the action of the lambs in every particular. It is 
for his interest to allow them some liberty to play — some 
freedom of action. If he manages them in a cruel and arbi- 
trary manner, they will sicken and die, and their carcasses 
will not be as valuable as though they were fattened for the 
slaughter. For a similar reason the fisherman allows the 
trout to play after he has been hooked; and on every hand 
we see instances in which those who are sure of ultimate 
control find it for their interest to allow a victim to have his 
own way for a time. 

A similar policy is advisable in the contest that takes 
place between the professionals and amateur speculators, 
who are well named the lambs. The professional must ar- 
range his campaign so that he will ultimately triumph; but 
he must often stoop to conquer. Furthermore, he is not 
always successful at first. The speculator, if he wishes to 
be permanently successful, must adapt himself to changing 
conditions as they are presented; and he must have infinite 
tact and learn not to press an advantage too far. The names 



PRICES — SOME FALLACIES CONSIDERED 113 

of numerous speculators are called to mind who were suc- 
cessful as bears for years at a time, but who ultimately lost 
all in a prolonged bull market. In order to be successful, 
therefore, it is necessary to conform most of the time to the 
wishes and prejudices of the mass of speculators, even 
though they may be unskilled, and carefully to select the 
time for opposing them. 

Obviously, then, it is the expedient policy of the profes- 
sionals to give the amateurs full rein, and to encourage 
them to speculate on the side of the market that they wish. 
The professional is not always a bear; it is for his interest 
part of the time to be a bull, and it is especially for his 
interest to turn and be a bull when the bear party becomes 
too large. His efforts are directed to persuading traders to 
purchase, and he endeavors to rush up prices so that he can 
sell on the rise. This policy increases his profits and makes 
a top-heavy market, which is almost certain to go down 
from the liquidation of the numerous buyers who soon tire 
of their holdings. 

It would be extremely unwise for the market leader to 
attempt to force the prices of commodities below their cost 
of production. He could not tell at what time a rival man- 
ipulator would load up with long stuff and then, perhaps 
taking advantage of some crop damage report which 
brought the public into the market as bulls, would scare 
bear traders into covering and ultimately ruin the bear 
leader himself. Such catastrophes have been known to 
occur; and any speculator, even though he have great 
power in the market, shows his wisdom by conforming to 
the prejudices of the amateurs rather than in going against 
them. Manipulative purchases may often be made with 
good chance of profit above the legitimate value of a com- 
modity; but seldom or never is it good policy to make sales 
below it. 

In this connection it is sometimes said that the profes- 
sional seller can tire out the buyer; and hence, when the 



114 VALUE OF ORGANIZED SPECULATION 

short is covered and the long liquidated, it will be at a low 
price. Considering only the question of capital, it is no 
doubt true that the professional has greater strength than 
the outside speculator, and has enough money to margin 
a deal farther if he wishes to. But there are other consider- 
ations which make it bad policy for the bear to protect a 
selling contract indefinitely. Indeed, the right to deliver a 
commodity at a certain time can hardly be made as an 
investment or so considered. 

The expression "investment seller" has been coined, but 
one can scarcely hear it mentioned without a smile; and it 
seems almost incongruous to consider such a mere contract 
to deliver as property of any sort. Looking at a trader who 
considers a short sale as a kind of investment, the fact 
might be noted that the short seller of stocks is not obliged 
to pay interest, but he must pay any dividends declared on 
the stock that he has sold. In grain and other commodities 
the short seller can usually, in case there is a large stock of 
the commodity on hand, transfer from one option to an- 
other at an advanced price, and thus make the carrying 
charges. In some years these carrying charges have been so 
large that many have made an excellent income by thus 
keeping out a short line and changing over to a far-away 
option as delivery approached. 

But such a method of investing is extremely treacherous. 
Any kind of a squeeze or corner will start the near-by 
option to going upward; and the investment seller must 
buy in his short at an advanced price or find the commodity 
for delivery. Furthermore, in such a case, when he under- 
takes to sell the far-away option in order to recoup his loss, 
he is likely to find it quoted, not at a premium but at a dis- 
count. Investment selling is so dangerous that the term 
itself is a misnomer; and all short sales, if made on organ- 
ized markets, should properly be called speculation. 

Indeed, it is recognized on all sides that the short con- 
tract is merely a temporary speculation; and shorts can 



PRICES — SOME FALLACIES CONSIDERED 115 

usually be run to cover much more easily than bulls can be 
forced to liquidate. A long contract, however, can be 
turned into the solidest kind of an investment if the pur- 
chaser merely puts up enough money to pay in full for the 
commodity or security and takes the same off the market. 
Such being the facts, is it not fallacious to maintain that the 
seller has any special facilities to tire out the buyer, or that 
there is such strength in the position of a bear in the market 
that he has any preponderating influence? 

Different Seasons 

Some of those who hold that organized speculation has a 
tendency to lower the prices of commodities traded in, at 
times vary their charge by saying that it is at certain sea- 
sons that prices are lowered, especially at the time of the 
year when the crops are coming to market. The inference 
would be that, in the absence of speculation, at the season 
for marketing, the commodity would naturally have the 
lowest price. The crops must be stored and carried till the 
time for consumption arrives ; and, at market time, the large 
buyers, knowing that their purchases constitute the princi- 
pal demand, would hold back their orders till the producers 
were willing to sell at the lowest price. 

But when we have organized speculation there is a great 
body of traders dealing in futures, thus creating a demand 
for the same, and the cash market sympathizes with the 
market for futures. This great demand for speculative pur- 
poses has an overshadowing influence; and hence the de- 
mand and supply for the actual commodity is not so 
potent. The fluctuations, therefore, which would otherwise 
be noted, owing to seasonal scarcity or abundance, are not 
especially pronounced. 

In Table IV in the Appendix will be found the mean price 
for wheat for each month during the first decade of the 
present century. Also the average price is given for each 
month of the whole decade, so that the reader can compare 



116 VALUE OF ORGANIZED SPECULATION 

the averages of any month with the like averages of any 
other month and form some estimate of the seasonal varia- 
tions in price. In Table V like computations are given for 
corn, also for the decade 1901-1910. The prices both of 
wheat and of corn are those which prevailed in Chicago. In 
Table VI we have the average monthly prices of middling 
upland cotton in New York for the decade 1900-1909. And 
in the same manner as in the tables for wheat and corn, the 
average for each month for the whole decade has been com- 
puted, so that any seasonal variations in price can readily 
be seen. The averages for wheat, corn, and cotton derived 
from these tables are placed together in graphic form in 
Diagram IV, the purpose being to make any seasonal move- 
ment of prices as plain as possible. It will be noted that 
there is a tendency toward lower prices at the time for 
marketing and that advances are more likely to occur at 
other times of the year. But the point especially worthy of 
notice is that this advance, on the average, is but a mod- 
erate one, and is scarcely more than enough to pay for the 
cost of carrying. 

Examining the diagram in detail, we note that wheat 
shows the smallest seasonal variation. Indeed, when we 
consider the cost of carrying the cereal, the prices given 
during August and September are no doubt the best of the 
year. Wheat is a commodity in which there is much specu- 
lation, and the effect of it is seen in the remarkable even- 
ness which the market holds as regards price variation 
during the different months. 

There is much less speculation in corn than in wheat, and 
hence the reader should not be surprised to see that there is 
a greater difference in price between the seasons. The 
months of the year in which the new corn comes upon the 
market are seen to be the lowest; and it is probably a fact 
that the high months show enough of an advance more than 
to compensate for the carrying charge. However, doubtless 
owing to organized speculation, any such difference is very 



PRICES — SOME FALLACIES CONSIDERED 117 

small; and the good effects of speculation upon the corn 
market are seen in the fact that the price is able to hold up 
so well in the face of the enormous receipts that come on the 
market during the winter months. 





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DIAGRAM IV 



Prices of Wheat and Corn 1901-1910 and of Cotton 

1900-1909 AVERAGED BY MONTHS 



118 VALUE OF ORGANIZED SPECULATION 

The curve representing cotton is seen to fall considerably 
at marketing time, which is perhaps more than can be 
attributed solely to the carrying charge. Speculation in 
cotton, as has been shown above, is subject to certain dif- 
ficulties that do not belong to other forms of speculative 
dealing, which perhaps explains why it is that the market- 
ing of the crop has a greater effect than in the case of a 
commodity such as wheat. 

In general the tables and diagrams show the remarkable 
effect of speculative demand in holding the prices of com- 
modities firm at marketing time. It may perhaps puzzle 
some readers to understand the importance of carrying 
charges, or why it is that the values of commodities vary 
with different seasons of the year. As a familiar example, 
let us consider potatoes. Every one expects them to be 
higher in price in the spring and early summer than at 
digging time; and the reason, as every one will agree, is 
because, owing to their bulk, it costs much to store them, 
and there is much loss from decay and other causes. Wheat, 
corn, and cotton are not bulky as are potatoes, and there is 
not nearly so much wastage in keeping them. But wheat 
elevators, corn-cribs, and cotton warehouses are costly, 
and there is some loss, besides insurance premiums and 
interest on money, which brings the carrying charges up 
to such a figure that they must be carefully reckoned 
with. 

As corroborating the position here taken, the testimony 
of Mr. Pillsbury, quoted in a subsequent chapter, 1 might 
be referred to, in which he says that millers formerly 
made considerable profit by buying wheat in the fall at the 
time of heavy deliveries, and carrying until the time when 
the state of the roads prevented the deliveries from being 
as large. But since the system of dealing in futures has 
been introduced, the profit of the millers is not so great as 
formerly, because they do not have the favorable oppor- 
1 Cf. pp. 174-175, infra. 



PRICES — SOME FALLACIES CONSIDERED 119 

tunities which they previously enjoyed for making cheap 
purchases of wheat at the season when most of the crop 
comes upon the market. 

Referring to Tables I and II of the Appendix, which 
give the extreme prices for wheat and corn and the months 
at which the high and low prices were reached, we find, 
as would naturally be expected, that the extreme low of 
the year is usually when the crop is coming on the mar- 
ket, and the extreme high is usually in the spring months. 
However, as exceptions which tend to bring down any 
average, we might note that in the wheat market, the 
month of September is mentioned as being a high month 
five times and as being a low month but twice. Further- 
more the Hutchinson corner in 1888, when wheat went 
to $2 per bushel, occurred in September. As for the 
Leiter corner, it powerfully affected prices during the sum- 
mer and autumn months, so that December was the highest 
month in 1897, although the high point of $1.85 was not 
reached till the following spring, the decline being rapid 
from that point. 

Little is to be found in the diagrams and tables which 
can be construed as giving encouragement to the farmer to 
store his crops with a view to selling at the time when re- 
ceipts are lightest at the market centres. If a farmer be not 
already equipped with granaries, corn-cribs, and other 
warehousing facilities, he must build them; and there is de- 
terioration and risk of many different kinds involved in 
thus carrying his crops. Furthermore, the average in the 
spring months is brought up by corners and squeezes of 
which it is sometimes difficult to take advantage. Since 
few farmers specialize as speculators, it would be better 
for most of them to sell immediately at harvest-time, leav- 
ing to speculators upon the exchanges the uncertain pro- 
fits which come from running risks in regard to fluctuations 
in price. 



120 VALUE OF ORGANIZED SPECULATION 

Statistical Fallacies 

As just pointed out when examining the effects of specu- 
lation upon the relative prices paid for commodities at dif- 
ferent seasons, the anti-optionists are careful not to give 
figures or enter into any formal statistical argument. There 
are, however, statistics which they sometimes appeal to, 
which, on their face, give plausibility to certain of their 
theories. The favorite statistics used in this connection 
are those of the general fall in prices which characterized 
the period between 1873 and 1897. There were times of 
rising prices during these years, but the tendency most of 
the time, as all admit, was decidedly downward. It so 
happened, moreover, that the custom of dealing in futures 
in agricultural products, while of course a gradual devel- 
opment, assumed the form of a regular feature of the 
markets at about the year 1870. Hence the coincidence in 
time with the fall of prices gives some plausibility to the 
argument. 

In order to make the above argument impressive, how- 
ever, it is necessary to forget or ignore two important 
economic facts. The first is that the prices of commodities 
which are not traded in upon the speculative exchanges 
likewise declined at that period ; and the second is that, be- 
ginning with 1897, the tendency in all commodities has 
been decidedly upward, the advance being led by the agri- 
cultural products traded in upon the speculative exchanges. 
The reader has but to refer to Diagrams V, VI, and VII in 
order to see the tremendous rise in the prices of wheat, 
corn, and cotton at that time. The fact that commodities 
subject to organized speculation should decline more than 
others when average prices were falling, and rise more than 
the average during a general advance, proves nothing ex- 
cept what all should be familiar with, that those commod- 
ities which have been selected for speculative purposes are 
naturally ones the values of which are most fluctuating. 



PRICES — SOME FALLACIES CONSIDERED 121 

The Question of Commissions 

Among the sweeping assertions of the anti-optionists is 
one that the commissions for trading in futures are paid by 
the producers of the commodities called for. It is almost 
impossible to argue the question with them, because they 
never give proof or indicate in any way by what possible 
line of reasoning they arrive at the conclusion. Their easy 
method of settling the question will not bear examination; 
but the problem of who pays the commissions is an interest- 
ing one, and, in solving it, we find that the facts are grouped 
a little differently than in other departments of economics. 

As for the commissions upon the actual commodities when 
they are shipped to the board of trade, let us say, and sold 
by sample to a miller or exporter, they are ultimately paid 
by the same parties who would pay commissions and other 
expenses if the board of trade did not exist. They are paid 
by the same parties that pay any part of the cost of dis- 
tributing or producing commodities. 

As for the commissions upon the purely speculative deals, 
the question would be answered differently by different 
people according to the respective positions taken in re- 
gard to the nature of those transactions. For those who 
believe that trading in contracts to deliver commodities is 
pure gambling, and that no deliveries are ever made upon 
such contracts, or those who deny that the contracts have 
anything whatever to do with actual commodities, the posi- 
tion might consistently be taken that these commissions 
are paid by the same class of persons who pay the ex- 
penses of a gambling-house, namely, the patrons of the 
house — the players. It is difficult to understand how any 
one who takes the above position can consistently say 
that the expenses of trading are paid by the producers. 
They might as well attempt to argue that the percentages 
made by the book-makers on a race-track are paid by the 
farmers who breed the horses. 



122 VALUE OF ORGANIZED SPECULATION 

Moreover, opinions differ among the anti-optionists 
themselves. Not only do they differ as between individuals, 
but the opinions of the same anti-optionist, like the market 
that he is always dreaming about, may fluctuate con- 
stantly according to the exigencies of the moment. In- 
deed, there are few, if any, who stick consistently to the pro- 
position that organized speculation is pure gambling and 
that no deliveries are ever made upon futures. Many of 
them will make assertions to this effect; but, perhaps the 
next minute, they will be saying something which is abso- 
lutely inconsistent therewith. Most of them, in so far as 
what may be called their leading ideas can be separated 
from their various inconsistent assertions, take a position 
somewhat similar to that of this essay, namely, when traders 
are buying and selling according to the custom of the ex- 
changes, and when contracts are sold to others before de- 
livery is made, the thing, which in most such cases is being 
traded in, is contracts. 

But if anti-optionists agree with those of us who think 
in this way, then the same principles should apply as in the 
case of any trading in contracts to pay or deliver. Thus, 
if an investor buys a promissory note, or a mortgage, or a 
railroad bond, it is rightly assumed that the question of 
who pays the commissions is to be determined in the same 
manner that would be pursued in regard to any invest- 
ment. Promises to deliver commodities are no different in 
this respect from promises to pay money. When such an 
obligation is bought, it is absurd to go back of the contract 
traded in and say that the producer of the commodity 
which the contract calls for is the one who pays a commis- 
sion for its transfer. 

But the anti-optionists do not stick consistently to the 
idea that trading in futures is usually trading in contracts. 
Frequently, indeed, we find them saying that the contracts 
have nothing whatever to do with the commodities called 
for; but, at other times, they appear to conceive of them as 



PRICES — SOME FALLACIES CONSIDERED 123 

a kind of substitute for the commodity. Thus they are 
never tired of saying that a contract to deliver wheat, if 
thrown upon the market, will depress the price of wheat. 
In so far as such a statement means that the market for 
actual wheat sympathizes with the fluctuations of the 
market for futures, they are right. But establishing the 
point just stated is not proving that the commissions for 
trading in a contract are paid by the producer of what the 
contract calls for. 

The money market and the market for securities are re- 
lated in their fluctuations; but when an investor or specu- 
lator buys a railroad bond, the commission on the trans- 
action is not to be paid by the gold miner who produces 
the gold which the bond in its ultimate analysis calls for. 
If, for the sake of argument, we consider the supply of 
what is called "wind" wheat as a part of the supply of the 
actual commodity, then there is no more reason for say- 
ing that the part which the farmer produces pays the ex- 
penses of producing the "wind" part than there is for say- 
ing that the producers of the "wind" pay the farmer's cost 
of producing the actual wheat. In truth, however, each 
helps the other; for the large amount of both kinds of trad- 
ing enables the commission man to do a larger business and 
to do it more cheaply. 

Clearing -House Transactions 
The resemblance between the methods by which paper 
representatives are used to take the place of commodities 
in transactions upon the exchanges and their like use in 
finance is so obvious that it is an excellent argument for 
identifying the two classes of transactions; since organized 
speculation rests its case on the fact that it is a modern sys- 
tem and exemplifies the best and most economical methods 
of dealing. The statement is made, however, that real 
money is behind every note, check, or draft in a bank clear- 
ing-house; while upon the speculative exchanges, by the 



124 VALUE OF ORGANIZED SPECULATION 

ringing-out process, the delivery of the commodity is dis- 
pensed with. 1 

But the statement is a mistaken one. Indeed, the strik- 
ing feature in modern finance is that actual money plays 
such a small part in doing the work of making transfers. 
By examining any bank statement we see what a small pro- 
portion the actual money on hand bears to the total 
amount of either the deposits, the loans, or the clearings. 
In truth, the analogy is perfect between the forms of mod- 
ern banking and the manner in which representatives take 
the place of commodities upon an exchange. 

In banking the depositor has the right to demand gold 
or legal tender for every dollar of his deposit. A few de- 
positors do make such demand; and, if paid in paper legal 
tenders, they are redeemable in actual gold. But the de- 
posits of a bank far exceed in amount the money available 
to pay them, and very few depositors want the money itself. 
The deposits exist upon the books of the bank, and are 
transferred from one account to another or from one bank 
to another by the different financial instruments. 

It is precisely the same in principle with futures upon 
the board of trade. The seller is in all cases obligated to 
deliver the actual commodities called for by the contract, 
which he may do by warehouse receipts. In some cases 
the buyer does insist on getting such delivery, and uses the 
warehouse receipts to draw out from the elevator or ware- 
house the wheat or other commodity, whatever it may 
be. But in most cases purchases and sales are checked 
off against each other by modern accounting methods; 
and intangible promises are thus made to perform the 
purpose of actual transfers of commodities in the same 
way that all the instruments of modern finance are utilized 
to save the handling of actual gold in monetary transac- 
tions. 

1 Cf. Testimony before Committee on Agriculture, House of Representa- 
tives, 1st Sess., 52d Congress, p. 286. 



PRICES — SOME FALLACIES CONSIDERED 125 

Hedging misunderstood 

The purpose of hedging, as before explained, is to pro- 
vide compensation against loss in a business transaction 
by making a deal of a different nature which will pay a 
profit, or at least remain intact, at the same time that the 
first deal is showing a loss. The anti-op tionists fail to un- 
derstand such a transaction. They think, or some of them 
do, that the hedging deal is a separate trade and has no con- 
nection with the original one. For instance, Mr. W. E. 
Bear, in condensing and re-stating the opinion of Mr. C. 
Wood Davis, says that after a receiver "has bought a 
quantity of grain he hedges by selling a future against it, 
and he has no further interest in the price of the actual 
grain, while he has an abiding and intensely absorbing in- 
terest in depressing the price in order that he may buy in 
his outstanding contracts at a profit." 1 

In answering, it may be admitted that, considering both 
deals together, the hedger, after he has made them, has 
no further interest in the price except in so far as the 
original deal and the hedging deal may not move exactly 
in harmony. But, according to the critics just quoted, the 
two deals apparently do not stand together in the mind of 
the hedger; for it is declared that he has no further interest 
in the price of the actual grain, but at the same time he is 
very anxious to make a profit on his short sale. 

Perhaps a practical example will best bring out the fal- 
lacy of this argument. Suppose the receiver buys wheat 
at $1 per bushel and sells against it at $1.05. Suppose 
further that the cash wheat and the option each decline 10 
cents. The cash wheat would then be 90 cents and the 
option 95 cents. The dealer, who is so intensely interested 
in seeing the price of his future go down, now has a profit 
on it of 10 cents and a loss on his actual wheat of the same 
amount. He closes both deals, and receives the account of 

x Journal of the Royal Agricultural Society, vol. iv, Third Series, p. 305. 



126 VALUE OF ORGANIZED SPECULATION 

purchase and sale from his broker. This shows that he has 
made 10 cents per bushel in his transaction in futures. But, 
when he examines the account of his cash transaction, he 
finds that he has lost 10 cents per bushel; and hence we see 
the absurdity of supposing that he has no interest in the 
price of actual grain. 

Either the deals should be considered together or they 
should be considered separately. If they are considered 
together, then the hedger has no interest, or little interest, 
in the fluctuations in the price of either futures or actual 
wheat after he has hedged. But if they are to be considered 
separately, then he has an intense interest in getting a 
profit on his short sale and an equally intense interest in 
getting a profit on his long purchase. Thus his interests in 
the market balance; which brings us back to the original 
proposition, that after he has hedged he does not wish the 
market to go up any more than he wishes it to go down. 
But when we fail to realize this balancing of interests, and 
assert that he has no interest in his long deal, but at the 
same time is greatly interested in his short deal, the height 
of absurdity is reached. 

Restricting Trade 

It is seen from the position taken by different writers and 
business men, as discussed above, that the fault which is 
most often found with organized speculation is that it 
favors short selling. But it would appear that when the 
liberty either to buy or to sell, according to the opinion of 
the trader upon the market, is restricted, the idea of a free 
exchange has been lost sight of. For organized speculation 
exists in order to make prices; and the principle on which 
it is based is that the best method to give freedom in price- 
making is to afford the greatest facility to all parties to 
make such bids and offers as they wish. 

When you give people the impression that you are afraid 
that they will do a certain thing, you increase their desire 



PRICES — SOME FALLACIES CONSIDERED 127 

to do it. Parents and guardians keep this idea in mind while 
training children, and the principle is worthy of being con- 
sidered by older people as well. It is applicable in small 
business enterprises as well as large ones, and it becomes 
especially important in banking. The bank officer who 
wishes to avoid a run on his institution never does so by 
informing his depositors that the bank cannot, or will not, 
pay them. On the contrary, unless the bank actually sus- 
pends payment, he is loud in his protestations that he is 
perfectly willing to pay all depositors in full. 

Returning now to the speculative markets, it may be 
said that if you diffuse in the minds of the speculators the 
idea that some one is afraid they will sell too freely, you 
create distrust at just the time when it is most harmful. In 
the excitement of a bull campaign, this distrust might not 
show itself at first; but when the tide turned, and the 
numerous long holders began to realize, it would suddenly 
be remembered that an important class of sales had been 
prohibited, that the steadying effect of the covering of 
shorts would then be absent, and that all the long buyers 
who had contributed to the advance must engage in a 
frantic scramble to sell. Thus a one-sided market is one- 
sided going up and one-sided coming down. It is impos- 
sible to make the market so that all deals must in every 
case be purchases. By attempting such a thing the princi- 
pal effect is to bunch the persistent buyers at one time and 
the persistent sellers at another. The only method by 
which this condition can be avoided is to permit such free- 
dom in trading that selling and buying stand on the same 
plane, so that one may sell before he buys or buy before he 
sells with equal facility. 

Commerce is Natural 

To attempt to interfere with commerce and to mutilate, 
bind, and restrict it so that it may be made to go at the 
certain kind of a hop, skip, and jump that its trainer wishes, 



128 VALUE OF ORGANIZED SPECULATION 

is a fallacy. It may apparently perform these antics, and 
they may be curious in the same way that the acrobatic 
feats of men and animals are curious. Yet the units in the 
world of trade and production do not best accomplish their 
daily tasks by relying on commercial gymnastics. 

Commerce acts best where it is free; and the attempt, 
particularly so to restrict it that purchases and sales do not 
stand on an equal footing, has been made by nations with 
unfortunate results. There must be a sale with every pur- 
chase. It is trade that makes trade. If speculators know 
that they may sell when they wish, they will be able to 
buy with better discretion; and their action both in buying 
and selling will be better distributed and serve to steady 
the market. The Mercantilists thought that they could so 
arrange things that certain people would do most of the 
buying while certain others did the selling; but their efforts 
to accomplish the results hoped for were futile. Reciprocal 
action must be appreciated if there is to be freedom of 
trade, and the true effect of bargaining cannot be realized 
if there be restriction at any point. 

The Legitimacy of Fluctuations 

It is perhaps because of the manner of doing business 
upon a speculative exchange — because of the very absurd- 
ity of men standing about and shouting business proposi- 
tions at one another; or conceivably the temptations into 
which the speculators are led is the reason; or possibly it is 
because the deliveries of actual commodities upon an ex- 
change are so few; or, most likely of all, it may be because 
those who lose money in speculative operations wish to 
attribute their losses to any cause but their own folly; — 
for some or all of these reasons the impression has become 
common and it is frequently stated that the quotations 
which issue from a speculative exchange are not legitimate, 
and that they are merely used for the purpose of deceiving 
people. Those outside exchange circles get their ideas from 



' PRICES — SOME FALLACIES CONSIDERED 129 

various sources which exaggerate the power of prominent 
traders, and the rank and file of speculators believe, or pre- 
tend to believe, that the commission houses are in league 
with the market leaders, that the position of the traders in 
the market as to whether they are long or short and the 
size of their margins is communicated to these leaders, and 
that they then put the market to such a place that the 
greatest number of accounts will be frozen out. And each 
speculator thinks, or pretends to think, that his own par- 
ticular account is the one for which they are especially 
gunning. 

Before considering these charges, it should in all fairness 
be admitted that other forms of business, as well as the 
purely speculative ones, are subject to arbitrary and un- 
natural methods in fixing prices. Beginning with the large 
trusts, and passing to those combinations which exist 
among milkmen, cab-drivers, and even among professional 
men and laborers, we can readily see that there is no pro- 
fession or employment in which the buyer and seller come 
together in exactly the manner assumed by the classical 
economists, or in which they buy and sell only according to 
the motives which actuate the supposed economic man. 
Custom plays a larger part in fixing prices than many im- 
agine; and sentiments, both good and bad in a moral sense, 
are always having their effects in making prices and direct- 
ing trade. But the faults of the exchanges as price-makers 
are not similar in all respects to the particular faults which 
result in artificial prices in outside business; and neither 
those who are unfamiliar with exchange operations, nor 
those who are embittered by the loss of their money, are the 
ones best fitted to make an impartial criticism. 

However, many of the arguments advanced by critics 
must be admitted to have weight. It is true that there is 
manipulation of prices; and it is also admitted herein that 
some of the fluctuations in the prices of future and other 
contracts are not due to legitimate changes in the value of 



130 VALUE OF ORGANIZED SPECULATION 

the commodities which are ultimately to be delivered; that 
many of them are due to changes in the value of contracts 
considered as counters in the game of speculation, and that 
primarily what the parties are really trading in is con- 
tracts. 

Having admitted so much, it would appear to many per- 
sons that the whole criticism of exchange operations is con- 
ceded. Yet trading in promissory notes, bonds, and other 
contracts is not considered illegitimate if done outside 
exchange walls; and many who do not call to mind this fact 
adhere to the fallacy that, if trading be really in contracts, 
then the demand and supply of the actual commodity called 
for can have no effect upon the quotations that issue. The 
question is a difficult one, and perhaps a practical illustra- 
tion will throw some light upon the matter. 

Let us suppose an extreme case — that a clearing-house 
which clears grain has 1,000,000 bushels of a particular 
long wheat future upon its books and 1,000,000 bushels of 
the future short, and that there is only a possible supply of 
100,000 bushels of actual wheat in the local elevators, or 
within such distance that it is practicable under ordinary 
circumstances to ship it in and use it to make deliveries. To 
some it would appear that a "natural corner'' would result 
at once; for, so they would say, the shorts would begin bid- 
ding for 1,000,000 bushels to fill contracts, and the 100,000 
bushels of actual wheat would scarcely count in the scram- 
ble. To the anti-optionists it would appear, on the con- 
trary, that, under the conditions supposed, the holders of 
long contracts would attempt to sell them; and, finding no 
buyers, the decline would be tremendous. 

In actual practice, both of these theories would be par- 
tially right, and both would be partially wrong. Some, but 
not all, of the shorts would wish to cover, and some, but not 
all, of the longs would wish to liquidate. And there would 
be new long deals made, and also new short deals, mixed 
indistinguishably with the others. As the time for delivery 



PRICES — SOME FALLACIES CONSIDERED 131 

approached, however, both longs and shorts would be 
changing over to a more distant option; and, when the 
month for delivery actually arrived, there would be com- 
paratively speaking but a small amount, either of long or 
short wheat, open. The 100,000 bushels of actual wheat in 
the case supposed would then be sufficient in most years to 
make the few deliveries desired. The explanation of the 
quiet accomplishment of this result is found in the fact that 
so many of the long future contracts had rung out with so 
many of the short contracts that there was only a small 
amount of wheat which was required to be delivered when 
this process had been accomplished. 1 

By duly considering the fact, therefore, that the average 
speculator settles his long contract by selling a short one, 
and settles his short contract by buying a long one, it is 
seen that the purely speculative business nearly balances 
itself; and that the demand for, and supply of, the actual 
commodity is an influence of the first importance. The dif- 
ferent factors mentioned in this essay and others of less 
weight will in the end have their effect. The shorts would 
be the most anxious to close their contracts; but the longs, 
also, would be frequently stampeded. The hopes and fears 
and the different subjective estimates of the various parties 
in regard to the value of the contracts would result in the 
short choppy movements of the market. But neither bulls 
nor bears would all be likely to attempt to do the same 
thing at the same time; when a bear rushed to cover, he 
would in most cases find a bull who wished to liquidate at 
the prevailing price. When long periods are considered, 

1 " It may be urged that the same quantity of wheat, which would have 
been sold but once by the farmer, is now offered first by the farmer to the 
short seller, next by the short seller to the long buyer, and finally by the 
latter again to somebody else, thus swelling the apparent supply and 
tending to lower prices. But in all such cases the fictitious supply has been 
met by a fictitious demand, which have all been balanced long before the 
month for which the contract had been concluded has arrived." Report of 
the Industrial Commission, vol. vi, p. 190. 



132 VALUE OF ORGANIZED SPECULATION 

however, and also the wider market movements, the de- 
mand and supply of the actual commodity would have an 
influence much greater than any other factor. 

Some of the sellers of futures would insist that they be 
permitted to deliver the actual commodity; and some of 
the buyers would insist that the actual commodity be de- 
livered to them. Combining this supply and demand with 
the supply offered by producers and the demand from con- 
sumers, we have the element which varies the most and the 
one which would be more likely to turn the scale than any 
other. 

This theory of prices upon a speculative exchange is 
abundantly borne out by statistics. Laying aside the gusts 
and eddies of speculation and the choppy movements, it 
will be found that, notwithstanding the manipulations that 
take place, the prices of commodities vary with the demand 
and supply as shown by the net visible supply in store. 

In Table VII of the Appendix will be found the mean 
prices of wheat in Chicago, computed separately for each 
month, and averages taken for each year ending with June 
30. Table VIII gives the visible supply in this country and 
Canada, not disposed of with reference to ultimate destina- 
tion, but easily obtainable to influence the market or to 
supply any unexpected demand, as it was reported for the 
first of each month in the years named, also the visible sup- 
ply averaged each year ending June 30. In Diagram V is 
shown a curve representing the yearly average prices as 
given in Table VII and another representing the variations 
in the visible supply as given in Table VIII. The curve 
representing the visible supply has been reversed, so that, 
when it bends downward, it shows that the supply is grow- 
ing larger, and when it bends upward, a smaller supply is 
indicated. The reason the curve was made to vary in this 
way is because an increase in the visible supply is a bearish 
indication, and a decrease is a bullish indication. If, then, 
the price of wheat goes down with an increase in the visible 



PRICES — SOME FALLACIES CONSIDERED 133 

supply, and goes up with a decrease, the curves as arranged 
would indicate it, and suggest that the market did move in 
harmony with the demand and supply as revealed in the 
visible. 





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DIAGRAM V 

Average Prices of Wheat and Average Visible Supply 
(Reversed) Years ending June 30 

By examining the diagram the reader will see that, while 
there is by no means a proportionate variation between the 
two curves, their most important movements are coinci- 
dent. Furthermore, it is seen that prices have a tendency 
to move sooner than the visible supply, thus indicating 
that the market leaders, from the reports of crops and acre- 
age, together with other indications of prospective change 
in demand and supply, were able to predict what the visible 
would be, and hence to initiate a price movement before the 
demand and supply of the actual commodity were reflected 
in the visible. 

In Tables IX and X, of the Appendix, are given the 



134 



VALUE OF ORGANIZED SPECULATION 



prices of corn in Chicago and the visible supply, compiled 
in the same manner as the previous tables. In Diagram VI 
we have curves arranged similarly to those in the preceding 
diagram, with a result almost as striking as in the case of 
wheat. 

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dling uplands cotton in New York, and in Table XII the 





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DIAGRAM VI 

Average Prices of Corn and Average Visible Supply 
(Reversed) Years ending June 30 

visible supply of American cotton, the year ending on Aug- 
ust 31 with the crop year. These statistics of cotton are pre- 
sented in graphic form in Diagram VII. Notwithstanding 
the Sully campaign and other manipulations, we find that 
the prices of cotton also vary with the demand and supply 
of the commodity. 

In considering the prices of stocks and securities, it will 
be noted that the question of whether they respond to the 



PRICES — SOME FALLACIES CONSIDERED 135 

demand and supply for such investments cannot be deter- 
mined in a similar manner, as there are no statistics of 
the amount of securities awaiting digestion. But it can 
be shown that the average prices fixed for them upon the 
stock exchange respond to the legitimate influences which 
should and do govern their values. Among the influences 





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DIAGRAM VII 

Average Prices of Cotton and Average Visible 
Supply (Reversed) Years ending August 31 

that should determine the legitimate value as an invest- 
ment of a railroad or industrial stock, the dividend that it 
pays, and the prospects for future dividends as revealed by 
its earning power, are no doubt the most important. In 
stocks, as in commodities, there are numerous false moves 
in prices, and many cases in which a stock will fail to con- 
form in price to a legitimate influence. When, however, the 
prices of a number of stocks are averaged, and when the 



136 VALUE OF ORGANIZED SPECULATION 

principal controlling facts just mentioned are carefully cal- 
culated, we should not be surprised to find that prices 
fixed upon the stock exchange are governed in their wide 
swings by legitimate influences. 

In Table XIII, in the Appendix, will be found the aver- 
age relative prices of forty common stocks for the years 
designated ending on June 30. The stocks which enter into 
these averages comprise thirty-five railway stocks and five 
express, steamship, and telegraph stocks. The quotations 
were taken from the "Financial Review," and were aver- 
aged under the direction of Wesley C. Mitchell. The rail- 
way dividends per mile and the net income of the railways 
per mile, which also appear in the table, were reduced to 
relative figures on the basis of averages for 1809-99 by the 
same writer from the "Reports of the Interstate Commerce 
Commission." 1 

The statistics have been placed in graphic form in Dia- 
gram VIII, so that the relation of cause and effect between 
the different factors can be readily traced. It is seen at 
once that the prices for stocks respond to the legitimate 
market influences as well as to the prices for commodities. 
The movements are not proportionate in stocks any more 
than they are in the case of commodities; but the facts 
which should naturally determine values are obviously re- 
flected in the prices. It will be noted that the income of 
railroads affords perhaps a better reliance than the divid- 
ends. For instance, it will be seen that the panic of 1903 
resulted in a depression in prices shown in the year ending 
June 30, 1904, and that there is also a decline in the income 
of railways at that date, whereas the dividend rates suf- 
fered no average decline. But the obvious explanation is 
found in the custom of American railway officers in keeping 
the rate of dividend on their properties as steady as pos- 
sible, and not varying it either up or down to suit all 
changes in income. 

1 Journal of Political Economy, vol. 18, p. 369; vol. 19, p. 298. 



PRICES — SOME FALLACIES CONSIDERED 137 

As stated heretofore, the influences mentioned are not 
the only legitimate ones. For instance, the average return 



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DIAGRAM VIII 

Relative Railway Dividends, Net Income and 
Prices of Stocks Years ending June 30 



138 VALUE OF ORGANIZED SPECULATION 

upon capital is important, and the condition of the banks 
throws much light on certain financial conditions which go 
far to account for market movements. Referring to the 
decline after the panic of 1907, as revealed in the above 
diagram for the year ending June 30, 1908, it will be seen that 
the decline in income was quite small, and that the decline 
in dividends did not make its appearance till the year end- 
ing in June, 1909, — which corroborates the fact of com- 
mon knowledge, that the panic of 1907 was chiefly financial 
in its nature, and its effects were not so important in the 
world of general commerce as has been the case in other 
panics and crises. 

Unless the tables and diagrams given herein are proved 
to be false, it is believed the assertion should not be made 
that the quotations which come upon the tape are merely 
a string of figures sent out by the market leaders with the 
intention of deceiving the public. Tlie more the problem 
is examined, the stronger becomes the conviction, that these 
leaders are but a part of the vast mechanism of commerce, 
and that they can only succeed by conforming their opera- 
tions, in the broad outlines at least, to the legitimate tend- 
encies of the market. 

Summary of the Last Two Chapters 

If trade were really free, if all dealers and producers 
acted with judgment and discretion, and if the facilities at 
hand for conducting each business were in all cases perfect; 
then speculation, as well as any business, would show bet- 
ter results to the community. One of the duties of organ- 
ized speculation is to fix prices upon a legitimate com- 
mercial basis and to provide for their continued adaptation 
to the movements of trade and industry. It must be con- 
fessed that the result is accomplished but indifferently. 
The reason is principally found in the fact that the similarity 
of the business to gambling leads into the market all kinds 
of adventuring traders who have not given serious and 



PRICES — SOME FALLACIES CONSIDERED 139 

painstaking study to the question of the fluctuations of 
prices and market movements. 

Some of the important movements of prices under organ- 
ized speculation are due to the trading of the amateurs or 
unskilled operators just mentioned. The great number of 
purchases and sales that they make, most of them being 
based solely on mere whim or caprice, causes an exceed- 
ingly erratic market with numerous rapid minor declines 
and advances. But the professional speculators, many of 
whom deal in the actual commodities, have sufficient nerve 
and skill to anticipate the larger reactions and cycles and so 
to narrow down many of the wider swings of the market 
and keep it within closer limits. 

The natural tendency of speculative markets is toward 
bullishness; but the advances engineered upon the ex- 
changes are continually cut short by the action of bear 
speculation and the supply of actual commodities and 
securities. The speculative prices of commodities and 
securities seldom fall below their cost of production; but a 
legitimate price is reached, usually several times during the 
year, which permits the commodity to pass into consump- 
tion and the security to be purchased by careful investors. 
A market in which speculation is organized consists of a 
number of advances from the natural consumption or 
export point and back to that point. This natural tendency 
toward bullishness in speculation is so important, and the 
number of speculative deals so largely overshadow the 
transactions in the commodities for actual use, that, even 
at harvest-time, when the larger part of a crop is being 
marketed, there is little more tendency toward decline than 
at any other period of the year. The charge made against 
organized speculation that it depresses prices is utterly 
unfounded ; and the most cursory examination would prove 
the absurdity of the proposition. Those who charge that it 
advances prices, however, are more logical. 

As a price regulator, therefore, organized speculation has 



140 VALUE OF ORGANIZED SPECULATION 

some excellences mixed with serious faults. Organization 
tends to make any activity more effective; and the princi- 
pal task accomplished by the speculator, whereby he stops 
a decline by his purchases and an advance by his sales, is 
facilitated by giving him the opportunity not only to buy 
before he sells, but also to sell before he buys. On the other 
hand, the extreme ease with which a deal may be made 
upon a speculative exchange and the small capital required 
are attractive influences upon the unskilled speculators, 
whose operations cause most of the confusion and erratic 
fluctuations seen in speculative markets. These amateur 
speculators, while losing their own money, derange the 
market, creating tendencies which even the wealthy pro- 
fessional speculators only partially overcome. 



J 



CHAPTER IV 

INDIRECT EFFECTS 

A Continuous Market 

Those who trade upon the exchanges are directly subject 
to the effect upon their fortunes of the prices which are 
continually being made. But the market which is thus pro- 
vided is taken advantage of by different persons in the 
community; and exchange trading has its effect in the most 
remote and unexpected places. 

Commodities and securities in which there is organized 
speculation are provided during exchange hours with a 
continuous market, and the difference between successive 
quotations is not nearly so great as in the unorganized 
markets. The producer of wheat, for example, may be 
assured that, if he rejects an offer for his crop, the market 
will not recede from his reach except by gradual move- 
ments which are seldom more than a fraction of a cent at a 
time. Even if the price should have an extreme decline, 
there will be abundant opportunity for him to sell his 
product on the way down. 

The market for real estate is unorganized, and is quite 
different in its workings. The price of land or any other 
kind of real property may be boomed in the same way as 
any speculative favorite upon the exchanges. But in real 
estate, when the advance has spent itself, we find that fre- 
quently there will be a sudden change and the property 
become unsalable. As the saying is, real estate under such 
circumstances, "cannot be given away." 

The reason for this difference is that real estate cannot be 
made the subject of organized speculation. Each piece of 
land has its separate characteristics, and a certain formal- 



142 VALUE OF ORGANIZED SPECULATION 

ity in making transfers is necessary; whereas organized 
speculation, as it exists, requires that the commodity 
traded in be sufficiently uniform in character so that it can 
be graded, and that there be no obstacle to facility of 
transfer. 

So highly is a continuous market esteemed by business 
men that they will even select a commodity for production 
which is subject to great uncertainties, provided it has the 
advantage of being traded in upon the speculative ex- 
changes. An illustration of such selection and its effect in 
determining the industries of a country is commonly seen 
among the farmers on our Western prairies. The home- 
steader or new settler, if he be poor or in debt, will fre- 
quently put his land into wheat — not in every instance 
because he thinks that a single crop will pay better than 
mixed husbandry, but because he believes, as he expresses 
it, that wheat is a "cash crop." In other words, there is a 
continuous market for it upon the exchanges, and there is 
always a demand from speculators, even though the buyers 
for milling or export may hold off. The local buyer, in the 
case of a commodity which has a continuous market upon 
the exchanges, is always ready to make an offer based on 
the exchange quotations, which appear at all seasons of the 
year and never show the sudden sweeps in price so often 
seen in the case of non-speculative commodities. But if the 
farmer resorts to mixed husbandry, he may, or he may not, 
find a market for his crops. 

In the matter of making loans upon collateral security, 
the advantage of the continuous market is obvious; for, if 
the lender be offered a security that he can readily realize 
upon, he can do business with safety to himself, and he will 
grant the loan upon favorable terms. It is, therefore, with 
sound reason that the banks of Chicago have repeatedly 
signed remonstrances to Congress when anti-option laws 
were proposed, and have stated in memorials that the pre- 
sent system of lending money upon elevator receipts was an 



INDIRECT EFFECTS 143 

excellent one, and that dealing in futures upon the board of 
trade was the best safeguard for the system. The banks of 
New Orleans also have been equally emphatic in commend- 
ing the trading in options upon the cotton exchanges as in- 
creasing the safety of lending upon warehouse receipts ; and 
the bankers of other cities, including New York, have 
signed similar memorials indorsing the present system. 1 

As regards stocks and securities, the continuous quota- 
tions and liquidity afforded by the exchanges stand at the 
very foundation of our financial system. Stocks and bonds 
whose values have been tested by organized speculation 
are considered excellent collateral for loans, as they always 
have a value if offered for sale upon the stock exchange. 
This value renders them of great service in conducting large 
financial operations, and especially in making payments in 
international trade. Furthermore, the fact that money can 
be borrowed upon securities renders it oftentimes unneces- 
sary to sell them even at a time of panic; for the banks are 
able, if excellent collateral be offered and the panic be not a 
serious one, to credit loans on their books, thus giving 
important relief in case of financial strain. 

The advantage of an investment which can be quickly 
turned into money is widely appreciated; and it is the cus- 
tom of financial institutions, as well as of individuals, to 
send surplus funds to Wall Street in order that they may be 
directly or indirectly invested in securities, or loaned upon 
them. Something can be said upon the other side in this 
matter, and this preference for the financial markets as a 
place of temporary investment has been severely criticized 
by some, as they claim it results in taking capital from local 
industries and in placing it under the control of the great 
manipulators of finance. But, in a broader view, the send- 
ing of funds to the centres, where they are placed in stock 
exchange securities, appears as one of the few elastic fea- 
tures of our financial system. Wall Street does not get the 
1 Cf. Congressional Record, vol. 23, part 7, p. 6563. 



144 VALUE OF ORGANIZED SPECULATION 

investments of the country except when it offers attractive 
terms for them. The people want a place to which they can 
send their surplus funds, drawing interest upon them, and 
at the same time have good assurance that they can termin- 
ate the investment and get their money back whenever 
they wish it. Under certain conditions, Wall Street is the 
only place at which this service can be performed for large 
masses of capital; and, by its help, the banks and financial 
institutions are placed in such a position that they can do a 
like service for others. It is not a question of whether our 
central reserve city banks constitute the best instrumental- 
ity for holding the reserves of the smaller banks. Without 
the market furnished by organized speculation, the terms 
on which they would hold the reserves of the country banks 
would not be so favorable as those at present granted. 

When the finances of the country, are subjected to strain, 
the ultimate burden comes upon the securities market; 
and, remembering that it gets little assistance from any 
quarter, the wonder is that panics are so few. It is the 
thousands of traders continually buying and selling by 
means of the facilities afforded by organized speculation, 
who make the market in which the disquieting results of 
ill-judged business ventures are finally liquidated. 

Panics 

Notwithstanding these facts, the stock exchange is 
accused of producing panics. No doubt the reason for this 
accusation is, that, in time of financial crisis, it is the place 
most prominently mentioned. All eyes are turned to it; 
and, very soon after conditions have been adjusted in Wall 
Street, outside commerce shows improvement. Yet it is not 
strange that monetary disturbances should be most notice- 
able at the financial centre. Commerce and finance are 
subject to disorder in the same way that all things human 
are; and, when unsound conditions are disclosed, the insti- 
tution whose proper function it is to guard the finances 



INDIRECT EFFECTS 145 

of the country naturally becomes prominent. The stock 
exchange should not be blamed because it is all activity at 
such a time and doing its duty in the midst of the disturb- 
ance. As well might we say that a hospital is the cause of 
disease because there are so many sick people within its 
walls. 

The exchange also is unfortunate in regard to some of 
the financial interests associated with it. For almost in- 
distinguishable from its membership are those who take 
advantage of its facilities in order to gain indemnity for 
reckless and dishonest transactions. The broker cannot 
enter into all the affairs of his client; and, when business is 
offered him, he accepts it as any one does under similar cir- 
cumstances, provided there is nothing that appears wrong 
on its face. Occasionally there will occur wide and sensa- 
tional fluctuations in the price of a security upon the stock 
exchange, implying manipulation from some quarter. 
When such manipulation occurs outside of an exchange, 
nothing is done or can be done except through the doubtful 
and tardy expedient of legislative action. Upon the stock 
exchange, such manipulation is made the subject of in- 
quiry; and, if members of the exchange are the cause of it, 
they are promptly disciplined. However, it is too often 
found to be the case that the real cause of the disturbance 
comes from traders who are not members of the exchange 
and hence are outside the jurisdiction of its authorities. 
The financial leaders who cause much of the trouble are 
often vociferous in attributing the disturbance to the insti- 
tution that saved them. 

Amateurism again 

In this connection it becomes important further to 
examine the question as to whose trading it is that fur- 
nishes the enormous number of transactions that go to 
make up the continuous market. One of the agencies is 
seen in the fact that the system of organized speculation 



146 VALUE OF ORGANIZED SPECULATION 

brings together all dealers who wish to trade in a particular 
commodity or security; and hence, in such an assembling of 
different interests and wishes, there is greater likelihood of 
finding some one who will accept a particular proposition 
than in case the different units be more widely separated. 
The modern commercial world is a large one, and the num- 
ber of business men is being continually increased. Hence, 
when those who may wish to buy or sell on particular terms 
throughout the country are concentrated in a certain place, 
the volume of transactions may be very large, and a wide 
range given to the number of propositions which may be 
made with a good chance of being accepted. 

Moreover, it may be said in answer to many writers who 
carefully calculate the number of times that a commodity 
is sold and re-sold upon the New York Produce Exchange, 
for instance, that such repeated dealing is not necessarily 
illegitimate or of a gambling nature. These writers, to be 
consistent, should adopt in its entirety the doctrine of so- 
cialism, which looks with horror upon gainful trade. How- 
ever, for those who believe that trading is one of the na- 
tural agencies by which commodities are distributed from 
producer to consumer, a different view may consistently 
be taken. Furthermore, the fact that a commodity may be 
handled a number of times upon the floor of the exchanges 
is matched by the fact that, in the modern process of manu- 
facture, a commodity must be handled a number of times 
in order to get the benefit of the greatest division of labor. 
The exact number of times is not the essential thing in 
either case. It is sufficient if we note that, with division of 
labor or any specialization of functions, the tendency is for 
the number of persons engaged to increase; whether it be 
in production, strictly considered, or in the distributive 
process as well, or whether it be'in a conceivable socialistic 
state, or in a state where individualism prevails. 

Having disabused our minds of the idea that an arithme- 
tical calculation is the best method to pursue in arriving at 



INDIRECT EFFECTS 147 

a conclusion as to the proper number of times that a com- 
modity be handled or transferred, the other side of the 
argument should be examined; and we should not blink 
the fact that the enormous number of deals upon the ex- 
changes is largely made up of the mere adventuring trades 
of the amateurs led into the market by the gambling spirit. 

It is the same with speculation as with any business, — in 
a broad sense the successful producer who makes money for 
himself has the best effect as a social factor; nevertheless, 
in some minor respects, the business community may pro- 
fit even from disaster. The flotsam and jetsam of com- 
merce may help some persons at the same time that the 
nation as a whole is made poorer by the wrecking of its 
valuable fleets. 

In the futile struggles of the amateur speculators result- 
ing from their unwise ventures, which are directly and in- 
directly a tremendous economic loss to the community con- 
sidered as a whole, we still have the compensating fact that 
their numerous trades supply most of the volume of the 
continuous market. There would be a broad market in any 
case from the mere concentration of a wide area of deals in 
a particular exchange; but it would not be nearly so broad 
as the market that now exists, where there is this active 
participation of the outside element. This is readily seen 
if we look at the number of transactions in a stock which is 
the subject of great interest and speculation by the unin- 
formed. 

Almost all of the important questions which are to be 
considered in determining the value of organized specula- 
tion centre about the activities of the amateur speculators. 
Their pathological mental condition must be carefully 
studied in order to arrive at any correct conclusion. They 
are especially important in America, as speculation in the 
organized markets is much more common here than else- 
where. In discussing the results of their activity Professor 
Emery says : — 



148 VALUE OF ORGANIZED SPECULATION 

"The question must be faced of the effect of eliminating 
the public from the speculative market even if it could be 
accomplished. It is sometimes supposed that such a result 
would be all benefit with no injury. On the contrary, the 
real and important function of speculation in the field of 
business can only be performed by a broad and open market. 
Though no one would defend individual cases of reckless- 
ness, or fail to lament the disaster and crime sometimes 
engendered, the fact remains that a 'purely professional 
market' is not the kind of market which best fulfills the 
service of speculation. A broad market with the partici- 
pation of an intelligent and responsible public is necessary. 
The writer ventured this opinion some years ago at the 
cost of considerable criticism. The German experience 
would, however, seem to bear it out. A narrow professional 
market is less serviceable to legitimate investment and 
trade, and much more susceptible of manipulation." 1 

While hesitating to express an opinion contrary to that 
of an economist who has done pioneer work in a difficult 
field, thus rendering it easier for those who follow, and 
while acknowledging in this place his obligation to the work 
of Professor Emery, the present writer ventures to say that 
the lack of skill and the recklessness of the amateur specu- 
lator should be bluntly stated and unsparingly exposed. 
The important consequences of his psychological condition 
should be traced and recognized, since they affect power- 
fully the value of organized speculation. 

Recurring to the excerpt given above, it recognizes, as it 
should, that the broad market of the exchanges is due in 
great part to the participation of the public; but, at the 
same time, the implication is given that it is possible for 
the public or the mass of unskilled speculators to operate 
intelligently in the market. The present writer, however, 
takes the position that the public as such is not competent 
to engage in any form of business. Every form of produc- 
1 Cf. Yale Review, vol. 17, p. 21. 



INDIRECT EFFECTS 149 

tion or distribution, whether it be of the nature of agricul- 
ture, manufacturing, or merchandising, should be under- 
taken only by specialists in their several lines. The public 
should not engage in business except as each individual, 
through division of labor and specialization of functions, 
operates in a particular field in which he has some aptitude 
and training. 

Among all callings the one to which it is especially diffi- 
cult for the average person to adapt himself, is that of spec- 
ulation. There is not one in a thousand, it might almost 
be said that there is not one in a hundred thousand, who 
possesses that modicum of good judgment, that level- 
headedness, that most uncommon form of common sense, 
which goes to make up the mental equipment of the true 
speculator. The speculator must have the faculty of look- 
ing through all the conditions which affect the determining 
price-making factor in a particular case. He must be 
neither an optimist nor a pessimist. If there be any calling 
which requires that things be seen as they are, without any 
mental coloring, either to make them appear better or 
worse, it is that of the speculator. He must be capable of 
broad synthesis, so that he can properly place the particu- 
lar commodity that he has in view as forming a part of the 
whole mass of commodities in price relations; and, at 
the same time, he must be capable of the most unsparing 
analysis of the price-making factors which control, or are 
supposed to control, in any particular field. 

If the above view of the speculator be correct, then ama- 
teurs have few indeed of the requisite qualifications. It is 
not denied that they may be eminent in art, music, or even 
in some form of business which they know; but it is plain 
that they do not understand speculation, else they would 
follow it with better success. The best place to study the 
peculiar attainments and general mental condition of the 
amateur speculator is in the broker's office. Let the investi- 
gator approach one of them in such a place, get acquainted 



150 VALUE OF ORGANIZED SPECULATION 

with him, and draw from him his life story. If he be an old 
trader, it will usually be found that he was at one time 
prosperous and that he lost his property as a result of 
speculation. If he be a beginner, it will in all likelihood 
appear that he is filled with a confidence in undertaking 
something that he does not understand which is extremely 
ridiculous in view of the probability of his failure. 

Shifting the conversation, ask your acquaintance what 
he thinks of the market. Here the absurdity of his posi- 
tion will be even more noticeable. It will be seen that he 
depends upon gossip and superstition, and that there is 
little which is rational about his talk. He believes that he 
has what is called a " tip " from some insider, or that he has 
been able to ascertain the intentions of the "big men" who 
are supposed to dictate matters. But more likely than be- 
ing a victim of tipsters, the adventuring speculator will be 
revealed as a follower of the most absurd superstitions. He 
believes that a certain number of days after a particular 
quotation is made, a certain market movement will take 
place. He believes that certain days of the week or month 
are lucky or unlucky; or that if a particular quotation is 
posted at, say 10.30, it will be an important indication as to 
the day's fluctuations. Or perhaps the opening range ap- 
pears to him as the determining influence; and he will care- 
fully watch to see whether the first figure of the range that 
comes out on the tape is higher or lower than the second 
one. This fact will be pointed to as an important indica- 
tion of the movement of prices for days in advance. Any 
absurdity, even of the most superstitious character, may 
be found as a part of his mental equipment. That the 
above description of the ordinary adventuring speculator 
is true can be ascertained by any one who will take the 
trouble to become acquainted with him. His activities are 
the merest attempts of the tyro to do something which he 
does not understand; and in cases where he has had expe- 
rience, he learns nothing from it. 



INDIRECT EFFECTS 151 

Summing up this subdivision of the question : it would 
appear that by the mere concentration within the walls of 
an exchange of numerous interests which would otherwise 
be separated, and by the participation of speculators who 
know their business, a broad and continuous market is 
given of great service to all interests. By reason of the vol- 
ume of trading by amateurs or unskilled speculators, how- 
ever, the market is made much broader than it otherwise 
would be; but the good that is thus accomplished is more 
than offset by the artificial markets and eccentric fluctua- 
tions caused by unwise speculative operations. Any good 
effects of the participation in the markets by amateurs 
should be availed of as a partial offset to the harm that 
they do, but the market would be sufficiently broad for all 
practical purposes without their help. The participation 
of the unskilled is no more desirable in speculation than 
it is in any other form of human activity. 

Hedging 

In hedging, the speculative markets are brought into 
such relation to the general business community that they 
perform a function akin to that of insurance; but many 
persons cannot understand this connection or this process. 
They say, and say truly, that in the trading in futures 
there are few deliveries of the actual commodity. If a 
miller sells wheat for future delivery upon the board and 
afterwards buys in that wheat, letting the one transaction 
check off against the other, these critics of organized specu- 
lation point triumphantly to the fact that in this transac- 
tion there has been no delivery of actual wheat. Yet the 
miller in making the deal may not be speculating. He may 
in reality be taking advantage of the fact that others are 
doing the speculating for him and performing a sendee 
similar in its essentials to the service which an insurance 
company undertakes for its policy holders. 

For instance, the miller, at the time when the farmer 



152 VALUE OF ORGANIZED SPECULATION 

brings his crop to market, may be offered an abundance of 
wheat of the grades which it would be practicable for him 
to use in milling for his trade, and at such a price that he 
could use it with profit. But the process of milling is not 
an instantaneous one, and wheat and flour both fluctuate 
rapidly in value. Long before he has his year's supply of 
wheat milled, there may have been the widest fluctuations 
in the market for flour. It might, for instance, decline 
heavily to such a price that there would be no profit in 
further milling. Under the system of specialization whereby 
the speculator runs the risk of changes in price, the miller 
has that particular department of his business taken in 
hand by another; and he is thus able to specialize more 
completely in operating his mill and marketing his product. 
The manner in which this is done is as follows : — 

Let us suppose that the miller <had laid in a supply of 
100,000 bushels of wheat for a year's milling. He then sells 
the same amount of wheat for future delivery in Chicago. 
When he does this, he has in mind the fact that cash wheat, 
future wheat, and flour all sympathize with one another in 
price, and may be depended upon, with few exceptions, to 
move together. Hence, should the price of flour and wheat 
decline, in all probability the price of futures would de- 
cline also; and the miller will close out his wheat futures, 
the profit in them compensating for his losses owing to the 
decline in the value of flour. This he does as the season 
progresses, gradually closing his short wheat as he sells his 
flour, thus keeping short of futures to about the amount of 
his stock of wheat and flour. 

A miller who has hedged in this way may be quite indif- 
ferent to the fluctuations of the market. He has not elimin- 
ated all of his business risks, but he has almost completely 
eliminated those risks which come from changes in price. 
Yet he is manufacturing and holding commodities whose 
values are most uncertain, operations which might other- 
wise subject him to losses such as he could ill afford to bear. 



INDIRECT EFFECTS 153 

This process is a little different from insurance in other 
forms of business, but the principle of it is the same. It is 
the transfer of risks by specialization in exercising business 
functions, and helps to cut down costs as truly as any 
method of systematizing production. The illustration 
given above is only one form of hedging; but the principle 
is of wide applicability and subject to almost infinite varia- 
tion. Again considering the case of the miller, he has, let 
us say, the opportunity to enter into an advantageous con- 
tract whereby he may bind himself to deliver a quantity of 
flour at different times in the future. But he does not at 
present own the wheat necessary, and has not sufficient 
facilities for storing it if he should buy it at present prices. 
By using the markets furnished by organized speculation 
as a hedge, he may have his margin of profit in the opera- 
tion of milling guaranteed to him. The manner in which 
he does this is very simple. He buys wheat for future de- 
livery upon the board of trade to an amount sufficient to 
make the flour that he has contracted to deliver. Then he 
buys actual wheat by sample of the quality that he wishes 
or of different grades, so that he may mix and grind to ad- 
vantage. But at the same time that he buys the wheat for 
actual milling, he sells an equivalent amount of his future 
wheat. Hence, if the price of spot wheat should so advance 
that his profit on milling were cut down, the profit on the 
futures that he previously bought, and is now continually 
selling, would make his losses good. 

It is to be noted in the illustration given that the miller 
is not insisting upon delivery of the actual wheat due him 
on his futures. He could so demand it and such demands 
are often made; but there is this objection to his pursuing 
that course. The wheat that he would receive on delivery 
might not be the best grade or grades for the particular 
purpose in hand. Then it may be that he was hedging in 
Chicago or Minneapolis, while his mill was located at, say, 
Winona or Fargo. In such case it would usually be more 



154. VALUE OF ORGANIZED SPECULATION 

advantageous to buy the wheat of local farmers or grain 
dealers and use his futures upon the exchange merely as 
an insurance policy, simply as a device for guaranteeing 
profits upon his contract to deliver flour. 

The method of hedging explained above is by no means 
confined to the flour miller. The cotton spinner hedges 
according to precisely the same principle; and those who 
manufacture corn and oats into different products also re- 
sort to it. In short, any manufacturer, whose raw mate- 
rial is of such uncertain value that it is traded in according 
to the future system on the exchanges, may use it. 

The exporter or dealer in a speculative commodity 
hedges in a similar manner. The local buyer will be in- 
formed by telegraph as to the price for futures of his com- 
modity, and, after buying of the producer at a price so 
fixed, with due allowance for transportation, he hedges by 
making a sale for future delivery upon the exchange. This 
reduces the buying of the commodity to almost an exact 
science, and gives to the merchant the ordinary profits that 
go to the dealer, relieving him at the same time of import- 
ant risks which he would be obliged to bear if he were not 
insured against fluctuations of price in the world market. 
Elevator companies and buyers of commodities send out 
bids based on the price for futures, while exporters and 
foreign buyers cable bids based on the same source of 
information. 

Warehousemen and owners of elevators use a similar 
system. An elevator, for example, may not have received 
from holders of wheat a sufficient quantity of the cereal to 
fill it. The owner in that case has a method by which he 
can fill his elevator and so earn storage charges. He pro- 
ceeds first to buy wheat from farmers and others, incid- 
entally, be it noted, bidding up the price when wheat is 
coming to market. But elevator companies are not well 
adapted to enter into the business of speculating in wheat, 
and their owners do not wish to run the risks of fluctuations 



INDIRECT EFFECTS 155 

in price. To be a dealer in wheat in that way — to buy 
a stock of it and sell it at the time when it is thought most 
advantageous — is quite different from merchandising in 
commodities of more stable value. Hence the elevator 
owner takes advantage of the facilities furnished by or- 
ganized speculation. He finds upon the speculative ex- 
changes traders who are willing to run these risks for him 
just as he finds, in the offices of insurance companies, 
persons who are equipped to run the risks of fire, or 
storm, or death. In hedging against price fluctuations, 
however, it is not an insurance policy that is used, but a 
contract for the future delivery of a commodity. When, 
for instance, there is a large quantity of wheat in store, 
the more distant option sells at a higher figure than the 
cash commodity. This difference constitutes the cost of 
carrying the wheat till the future date. Thus by selling 
according to the future system and delivering the wheat 
when the option matures, the elevator earns storage charges, 
and incidentally is one of the best customers which the 
farmer has for his product at the time he is bringing it 
to market. 

The above are but a few illustrations of the manner in 
which speculative futures can be used in different parts of 
the process of handling and manufacturing commodities. 
It makes no difference what the commodity is; the business 
principle in hedging is the same, provided only that there 
be a speculative exchange on which the deals may be 
made. 

But the word "hedge," used in this connection, is not in 
all cases restricted to the idea that a business man has 
protected himself in such a way that his hedging deal will 
necessarily fluctuate in exactly the same manner as his 
original deal. Indeed, a business man may hedge on any 
form of business venture by going into a transaction of a 
different nature, trusting that both ventures, by the law of 
chance, will not go against him at once. Inasmuch as the 



156 VALUE OF ORGANIZED SPECULATION 

speculative exchange furnishes the only continuous market 
in which a commodity or security can be sold at any time, 
it is the ideal place for hedging; and it is the only place in 
which a business man who fears some form of disaster can 
so hedge, without disposing of his particular investment, 
that in all human probability he may save a part at least 
of his profits in case his direct business interests are un- 
fortunate. 

For example, let us suppose a manufacturer engaged in 
some form of iron or steel business. His interests are not 
exactly identical with those of the United States Steel Corp- 
oration, but they are approximately so. When general busi- 
ness is excellent, all the iron-working plants in the country 
are put in service, and profits are good both for large and 
small companies. But when business declines, some of the 
more poorly equipped plants pass, out of service, and those 
that continue are by no means making the profits that 
they usually do. The shares of the United States Steel Corp- 
oration reflect in their price the vicissitudes of the steel 
and iron trade. But the small foundryman, who has per- 
haps recently improved his plant, possibly on borrowed 
capital, will feel the need of some form of hedge whereby 
he can insure himself against adverse general trade condi- 
tions. He needs insurance against a general decline in busi- 
ness even more than he needs fire insurance; and this is 
particularly important at a time of great business prosper- 
ity and activity. At such a time the shares of the United 
States Steel Corporation are likely to sell at a higher price 
than they do in times of panic; and the foundryman, in the 
case supposed, might well hedge by selling short a mod- 
erate number of the shares of the corporation. If business 
should continue good, he could make enough profit to get 
his house out of debt and to re-margin his short sale of steel 
corporation stock; and, by waiting till some period of busi- 
ness depression sets in, he could cover his short sale at a 
profit. On the other hand, if the business decline set in soon 



INDIRECT EFFECTS 157 

after he had made the short sale, this hedge would furnish 
perhaps the only reliance to save him from bankruptcy 
and ruin. 

In every form of business there is some kind of stock 
which can be sold as a hedge to guard against a general de- 
pression in trade. The owner of a railroad can sell the stock 
of other railroads; or the farmer can with advantage sell 
the stock of a railroad which serves his section of the coun- 
try, because, if crops in his vicinity are poor, the local rail- 
road will have small earnings and its stock will decline. In 
the case of a business for which there seems to be no par- 
ticular stock which it is especially appropriate to sell, a 
stock which in some degree represents the general business 
of the country, such as that of the United States Steel Corp- 
oration, would be an excellent hedge. 

There is risk in every form of business, especially in one 
that is being conducted with small capital; and it is to be 
regretted that the knowledge of how the stock exchange can 
be utilized in insuring against business disaster is not more 
widely diffused. At present it is only the large business 
houses that are in sufficient touch with Wall Street to take 
advantage of this form of hedging. However, there are 
many business houses, both large and small, that see the 
wisdom of holding bonds which are salable on the stock 
exchange, and on which money can be borrowed with facil- 
ity. Gilt-edged bonds do not have great declines in price 
during panics ; hence they are an excellent hedge and form 
the safest kind of a reserve against disaster. 

A business man who has such a reserve in the shape of 
bonds is in an enviable position, for he has always the 
continuous market furnished by organized speculation on 
which to dispose of them; and, if panic comes, he has excel- 
lent collateral on which to borrow money. So at perilous 
times, when the banker informs the business man, not so 
well provided, that it would be best for him to reduce his 
line of credit, the business man, with good investment 



158 VALUE OF ORGANIZED SPECULATION 

securities in his tin box, can furnish collateral and so in- 
crease his line, instead of being obliged to diminish it. 

The value of a business reserve in the form of securities is 
further increased by recent legislation which allows banks 
to issue notes on other than government bonds. Such a 
reserve is better than one invested in real estate; for some 
forms of real estate are considered by bankers merely as an 
additional burden upon a borrower, making him even less 
able to fulfill his obligations. It is better than to have it 
loaned; for, in case of such a panic as that of 1907, the best 
debtors may fail to keep agreements. 

In order to show the wide field of possible usefulness of 
the markets furnished by organized speculation, let us 
return to the farmer and suppose him prosperous with a 
granary full of wheat. He is not obliged to sell his wheat at 
this time, because he has sold other crops and has enough 
funds for his use. But he has his granary which has been 
built at considerable expense and must be used in order to 
get the benefit of his investment. There is a way in which 
he can, with his little granary, go into the warehousing busi- 
ness as a hedge upon his other investments, and with as 
great safety as the large elevators in the city. If he will 
look at the market quotations he will see December wheat 
selling at, say $1, and wheat for May delivery selling at, say 
$1.06. This difference of six cents represents the cost of 
carrying the wheat from December to May. It is the cus- 
tom of the elevator owners to fill their warehouses with cash 
wheat and then sell against it for future delivery, thus mak- 
ing the carrying charge as above explained; and our small 
farmer can operate on exactly the same plan and with equal 
chances of success. In the case supposed he could sell the 
contents of his granary for six cents more per bushel for 
May than for December delivery. Hence he has but to sell 
for May delivery upon the exchanges; and, when that 
month arrives, he finds that he has secured a profit equal 
to that which he would have got in December plus the six 



INDIRECT EFFECTS 159 

cents carrying charge as just stated. The above instance is 
not speculation. It is a case in which the farmer is enabled, 
by utilizing the exchange markets, to gO into the ware- 
housing business and thus make a hedging investment 
against his more risky business of farming. ^— J 

No attempt will be made here to multiply instances of 
the manner in which hedging can be used in the general 
field of business. To do the subject complete justice would 
of itself require a lengthy essay, but enough has been given 
to show the wide range in which hedging operations can be 
conducted. To enter into the subject in detail, examining 
every industry separately, and then to point out in each 
case the manner in which the speculative markets can be 
used to make regular and approximately certain the busi- 
ness interests of those who do not wish to take risks, is one 
of the most hopeful means of improving the condition of 
the people, and especially of building up the body of inde- 
pendent business men and furnishing a means whereby they 
may compete on equal terms with the large corporations 
and business houses. 

The task just outlined would be a crowning one, and 
would be important in the development of the process of 
specialization of functions, for it would be the setting-off 
of the risk takers so that those who are not in a position to 
take risks could throw them upon the shoulders of those 
who are willing. The speculative exchanges are delicate 
mechanisms whose use is but just beginning to be under- 
stood. They are great conserving forces and instrumentali- 
ties for good. All that is needed is to understand them, to 
acquire the skill of using them; and hence to avoid the mis- 
fortunes of those who, instead of properly using, actually 
attempt to play with edged tools. 

The World Market 

The question of prices is involved in much complexity, 
and it is difficult to express one's self in such a way as not to 



160 VALUE OF ORGANIZED SPECULATION 

be misunderstood. For instance, it is perhaps necessary to 
explain that, when a price tendency which affects the value 
of a commodity in a particular place is mentioned, it is not 
intended to imply that the commodity might not have a 
value in the world's market of which its local value is 
merely a variation. Thus it is that the local value of a 
commodity is said to be the same as the world value with 
proper allowance for cost of carriage. 

A commodity which is produced and consumed through- 
out the world and is the subject of international trade has, 
roughly speaking, two values: — its world value and its 
local value. And, roughly speaking, its price in the two 
markets is determined by quite different classes of persons : 
— the local traders and the world traders. As a result of 
that peculiar jealousy in human nature which accounts for 
the fact that a man is always saying that his own trade and 
that of his class or of his immediate business associates is 
most important, and that those who exercise other trades 
are exploiters, or at least non-producers, we find the feeling 
of opposition among farmers, for instance, against city 
dealers. The agriculturalist, instead of welcoming the 
action of the man who receives his crop and distributes it 
for consumption, appears to consider it a kind of desecra- 
tion for any one to trade in his product after it passes out 
of the hands of the local dealer. Yet both kinds of price- 
makers are necessary — the makers of world prices to con- 
sider the general demand and supply, and the local dealer 
and producer to agree on such deductions and allowances as 
are proper to account for the cost of transportation or other 
factors which make local prices diverge from world prices. 

The local dealer is no more fitted to determine the 
world's market than the student of broad conditions of 
supply and demand is fitted to understand the state of 
trade in a particular locality. Under present conditions the 
specialization is accomplished by concentrating those who 
consider broad price tendencies in the exchanges, a par- 



INDIRECT EFFECTS 161 

ticular city representing a wide area and there being com- 
paratively few exchanges throughout the world. 

The tendency of those whose business consists princi- 
pally of local affairs is toward provincialism. This narrow- 
ness is often criticized, and with good reason. Yet it is 
necessary that there be those who bring prices into touch 
with local conditions, even if the immediate elements of 
value be exaggerated; and the specialist on local prices may 
be pardoned if he sometimes attaches too much importance 
to the particular facts within his knowledge. 
/ The leaders of the exchange market, however, are im- 
bued with exactly the opposite tendency. Their function is 
that of determining world prices; and, in the broadness of 
their vision, they pay perhaps too much attention to those 
factors which are remote. The whole machinery and appar- 
atus of a speculative exchange is constructed in such a way 
as to fix attention on the world market. News is gathered 
from everywhere for the especial assistance of exchange 
traders, and far-fetched conclusions derived from foreign 
dispatches are perhaps given greater weight than should be 
assigned them. The quotations of other markets are con- 
tinually being posted, and the tendency to bring together 
the prices fixed on the different exchanges by the agency of 
arbitragers is highly important. The result is the modern 
world market, in which the prices fixed by the free inter- 
change of communication give the fullest effect to all the 
diverse elements of value. 

Admitting, then, that the makers of local prices and of 
world prices are neither of them perfect, and that each 
class attaches too much importance to its particular share 
in the price-making process, yet, in the broad field of com- 
merce, each is specializing in the manner most to be 
desired. The two kinds of dealers require each a different 
training; and it is one of the important factors in the value 
of organized speculation that it furnishes the machinery 
whereby this specialization is effected, the speculative 



162 VALUE OF ORGANIZED SPECULATION 

exchanges representing a world market to which all local 
prices can readily be conformed. 

The Directive Function l 

It is possible to imagine a community (although of course 
it would be a savage one) in which commodities would have 
no exchange value, but it would be almost impossible even 
to conceive of a state in which there is any civilization 
unless there be some kind of an arrangement for making 
prices. Even socialist writers, in describing their ideal, talk 
glibly of labor checks as a measure of value. In our com- 
petitive system, furthermore, the question of price is espe- 
cially important. Prices effect the transfer of labor and 
capital from one enterprise to another. For example, if the 
price of wheat fall, agriculturalists are not likely to sow as 
much of that cereal as formerly; and some of them might, 
in such case, abandon agriculture altogether, seeking other 
and more lucrative fields of activity. Prices, too, deter- 
mine the flow of commodities from one city or country to 
another; and, like a ship obeying its rudder, so the mass of 
business transactions follow the lead of the makers of prices 
in the world's markets. 

In fixing the price of commodities, it is important to 
determine, not only the present price, but to make some 
estimate, if possible, in regard to future prices. The nation 
must be forehanded; and not consume an entire crop till a 
subsequent crop has been assured. The advantage, then, 
as a means of directing business enterprises, of an estimate 
made by experts of future prices is readily seen. In regard 
to the prices of speculative commodities, there is such an 
estimate, backed in the best manner possible by actual 
transactions of the large business interests. The prices of 
speculative commodities and securities as fixed upon the 

1 Cf. Emery, Speculation on Stock and Produce Exchanges in the United 
States, p. 143 et seq.; Conant, Principles of Money and Banking, book vi, 
chaps, ii and in. 



INDIRECT EFFECTS 163 

exchanges are published in the newspapers and considered 
by all persons in the trade. It is necessary, as above ex- 
plained, to make certain deductions and additions in order 
to estimate what the present price of a commodity may be 
at a certain place. The future price of commodities at the 
great centres of commerce is the important thing to con- 
sider; and, that being established, the price which should 
obtain at a particular time and place is readily calculated. 
Thus it is that the specialization of functions becomes 
more and more complete; and the manufacturer, the pro- 
ducer, and the small dealer are not obliged to consider 
the broad movements of commerce which determine the 
world's price for a particular commodity. It remains only 
for them to haggle about the grades and other conditions 
of the transaction upon the basis of prices fixed upon the 
speculative exchanges. 

The Directive Influence of the Securities Market 

In the market for stocks and securities, this directive 
influence is even more pronounced than on the commodity 
exchanges, but the manner in which it is manifested is dif- 
ferent. In stocks the important consideration is the income 
that is yielded, and particularly the prospects for the con- 
tinuance of that income, or the possible increase of it. 

There are experts who are always examining the earning 
power of properties as shown by their reports and their 
physical condition, and basing their purchases and sales on 
the results of such examination. A stock which has good 
prospects of paying a six per cent dividend does not often 
decline below par. And when a stock, hitherto considered 
good, sells off rapidly in the absence of generally unfavor- 
able financial conditions, we may well look for some cause 
of deterioration, not readily apparent, which will account 
for the decline. 

Hence, notwithstanding the frequent fluctuations and 
other ill-effects of speculation previously noted, the prices 



164 VALUE OF ORGANIZED SPECULATION 

fixed upon the exchanges in their broad outlines are an 
excellent expression of the values of securities considered 
on the basis of their earning power and prospects. If we 
are impressed with the fact that the fluctuations of the 
stocks are eccentric, we should remember that speculative 
favorites are naturally the shares in companies concerning 
the value of which there is some doubt. As soon as the more 
important uncertainties in the value of a property are got 
rid of, the stock rises in price, is taken off the market for 
active speculation, and becomes a solid investment. 

This process is not perfect; and while a stock is thus 
undergoing digestion and assimilation, there may be mani- 
pulations, contests for control, and even insolvency or the 
appointment of a receiver. These unfortunate incidents 
are likely to occur during the early stages of a stock's 
career. But after its status has become established, and 
the adventurers whose enterprise has been useful in pro- 
moting new industries have left it to conservative manage- 
ment, the speculators upon the exchanges recognize the 
importance of the progress that is being made. For, long 
before conservative investors are willing to act, the specu- 
lators, by the prices that they make, indicate the proper 
value of the property; and later, after that value has been 
generally recognized, the stock is absorbed by investors. 

The good effects of organized speculation are best seen 
after it has had a chance to accomplish its work. It is the 
same with any function of any member of civilized society. 
Thus the labor of the builder does not appear to best 
advantage while the building is in the topsy-turvy condi- 
tion of being constructed. But wait till it is completed; 
then we may see the best effect of his work. 

Not only does Wall Street make useful indications and 
predictions in regard to the proper price of a particular 
security, but in regard to groups, the same excellent effects 
are noticed. For instance, if prospects for crops be poor 
in the farming section of the country, this fact will be 



INDIRECT EFFECTS 165 

reflected in the prices of the stocks of the granger railroads 
long before there are any tangible effects upon business 
conditions in the agricultural regions. 

General Business Predictions 

As regards general business conditions, the manner in 
which the average prices for stocks foretell the same is 
remarkable for its success. The speculative fraternity of 
Wall Street has long sought for some barometer that would 
foretell prices, but it has not succeeded in finding any single 
indication of the fluctuations of stocks which would accom- 
plish the purpose in view. The reason is because stock prices 
are so early to move in a business advance or decline. It is 
like gilding refined gold to use a barometer to indicate in 
advance the next movement of a barometer. 

The larger interests in finance and those best capable of 
judging the condition of the country usually have consider- 
able investments in stock companies. Not only do im- 
portant merchants and manufacturers have their holdings 
in the form of stocks, in the business which they manage, 
but many are wise enough to have a reserve fund which they 
can fall back upon, also in the form of securities that can be 
sold upon the speculative exchanges. Being in a position 
where they can see in advance of others the first tendency 
toward retrogression, they are likely, in case conditions are 
unfavorable, to provide themselves with funds by throwing 
some of their securities upon the market; and, while per- 
haps talking prosperity to keep up courage, they will thus 
unwillingly but actually initiate a decline. In the same way 
before a betterment of business conditions, these captains 
of industry and finance will see the elements of business 
improvement and increase their holdings of stocks. 

The successful speculators, too, from their close acquaint- 
ance with large business men and their study of statistics 
of banks, railroads, and other underlying conditions, will, 
in their operations, make such trades that they influence 



166 VALUE OF ORGANIZED SPECULATION 

the course of commerce and assist in initiating those larger 
market movements which begin before the corresponding 
upward and downward swells of general business. 

For these reasons the speculative markets have a spe- 
cially directive influence upon commerce and furnish a 
prophecy in regard to the future course of general business. 
If the commercial and industrial classes would follow the 
lead of the stock market in making their commitments, 
they would have an almost unfailing guide. Thus, in 1907, 
we had what is called a rich man's panic occurring in the 
early part of that year. Stocks were thrown upon the 
market by those who were able to gauge correctly future 
conditions, and hence the tremendous decline. But general 
business was not affected at that date. It was not until the 
panic in November that the country awoke to the fact that 
there were some unsound business' conditions. 

Beginning at that time, we had a somewhat depressed 
condition in general business which lasted for over a year. 
Those small traders who before were so buoyant had now 
become pessimistic, and were anxiously restricting their 
business commitments and selling at reduced prices the 
commodities and securities that they had previously bought 
at high prices. Only those who looked to Wall Street, or 
to the same facts that determined Wall Street's course, 
were advantageously guided in their business interests. 

For the stock exchange at this time had got over its 
pessimism and saw light ahead. A boom in stocks was in 
progress, and, while the remainder of the country was liquid- 
ating, the Wall Street markets were advancing. Later the 
directive influence of the great business men as reflected in 
Wall Street was felt upon the country, and there was good 
business in 1909. But early in 1910 we find the culmina- 
tion of the upward movement in stocks followed by a de- 
cline in business which was led by Wall Street liquidation 
and sagging markets. 

There are other guides that furnish an indication of the 



INDIRECT EFFECTS 167 

course of general business, but none of them are compar- 
able to the indication afforded by the course of the security 
markets. We can study, for instance, the proportion be- 
tween the loans and deposits at the banks, the lending rates 
of money, the bank clearings, the imports and exports, or 
the fluctuations in the prices of commodities; and we shall 
find that these and other statistics often throw light on 
future business conditions. But such statistics can only be 
used with the greatest discrimination, and the most glar- 
ing errors are made in interpreting them even by experts. 
Whenever a business man attempts to predict the course of 
trade by means of these statistics, and especially when he 
merely selects a few of them for examination and study, he 
renders himself liable to make the greatest mistakes. It 
would be much better for him to let the leaders of finance 
direct commerce, and confine his operations to making his 
own business follow their lead, as shown by the broad move- 
ments of stocks and bonds upon the organized markets. 

Some Exceptions considered 

It is just as much in accord with the natural order of 
things that Wall Street should direct the commerce of the 
country as it is that the farmer should grow crops. But the 
farmer does not always grow crops well; he sometimes 
makes a very bad mess of it. So also does Wall Street in 
its particular line. For instance, the Street may lull the 
financial world into a feeling of false security, or at other 
times it may give alarm of dangers which are not really 
impending; or a panic may appear by reason of quarrels 
between controlling interests as opposed to natural tenden- 
cies of general business. 

The panic of 1901 is a case in point, for it had little if any 
effect upon the general business of the country. All of the 
active stocks upon the list, with the exception of Northern 
Pacific, fell rapidly, and as quickly recovered. So rapid 
was the recovery that no one need have been deceived. Its 



168 VALUE OF ORGANIZED SPECULATION 

temporary character was also made apparent from the 
facts of its origin and accompanying circumstances, as 
narrated in the financial reviews at the time. 

One of the most interesting features of this directive in- 
fluence is that Wall Street exercises this function in spite of 
itself. It may be quite contrary to the wishes of the con- 
trolling interests that there should be a general business or 
speculative decline. Yet, if retrogression must come, each 
interest seeks to let go of its stocks before others; hence 
the decline is all the more suggestive, and the better indi- 
cation of what those in a position to know are actually 
doing. 

Talk is cheap, and those who express opinions are often 
misled into making false estimates of values, but when the 
talk is backed by actual investment, it furnishes a good in- 
dication. By means of the speculative markets, the invest- 
ments of the controlling interests of industry are bruited 
to the world and serve excellently well to furnish an indi- 
cation which it can adopt. The business community upon 
the outside does not realize the excellence of the stock 
market as a barometer of general business conditions, but, 
perhaps because these predictions are true, and evil as often 
as good, they are regarded with suspicion. 

Thus the prophecies of prosperity made by the stock ex- 
change are willingly believed and are greatly exaggerated, 
as they are assisted by the naturally bullish tendencies of 
the people and the self-interest of brokers and manipula- 
tors. But the prophecies for evil, in accordance with well- 
known traits of human nature, are not received with favor; 
and the people are even inclined, when the evil prophesied 
does take place, to visit their resulting wrath on the 
prophet. Like a Cassandra with the gift of prophecy, the 
stock exchange finds that its doleful predictions are not 
believed; and the people suffer because they will not fol- 
low the institution best fitted to direct their commercial 
activities. 






INDIRECT EFFECTS 169 

A Reduction in Costs 

Risks are inherent in nature, and must be reckoned with 
in computing costs in productive and commercial enterprises. 
In order to carry our risks as cheaply as possible, it is of 
advantage that the risk-takers should specialize and com- 
pete with one another. Further, they should be so organ- 
ized and have such intimate relations to other business men 
that their activities form a part of, and work in harmony 
with, the general productive process. 

Applying these principles to the organized markets, we 
find, in the first place, that the enormous number of purely 
speculative deals adds to the amount of business done in 
the exchanges. Hence, in accordance with a well-known 
economic law, the brokers, being assured of a good income 
from commissions on purely speculative business, find them- 
selves in a position such that they can handle the trade in 
actual commodities at a small cost and furnish excellent 
facilities and conveniences. This is true, when we consider 
commodities such as wheat, pork, and the like; and the same 
principle also applies in regard to securities. The commis- 
sions charged upon the speculative exchange seem infini- 
tesimal when compared with brokers' commissions in real 
estate or outside commodities. 

The effect of any insurance is to save cost. The small 
dealer in many different lines of trade has a stronger posi- 
tion and can compete with the large dealer to better advant- 
age than is commonly supposed; but he is handicapped in 
that he cannot afford to run risks which may at any time 
sweep away all of his small capital. The services and capi- 
tal of these small dealers are utilized by any system of in- 
surance which will enable them to run the necessary risks ; 
and thus the general public has the benefit of that much 
additional labor and capital competing in the productive 
process. 

By the system of organized speculation certain risks are 



170 VALUE OF ORGANIZED SPECULATION 

assumed by the speculators, as they make a market in 
which any one may trade, either in commodities or securi- 
ties. Hedging is one of the ways in which the benefits of 
this market are communicated to outside commerce. But 
something beside the direct effect of hedging is experienced 
as a result of organized speculation. The producer is in- 
sured against fluctuations in the price of particular commo- 
dities which are notoriously unstable in value; and hence 
is enabled to work at close range and devote himself to the 
practical details of the business, leaving to others the im- 
portant risks of price fluctuations. By this division of labor 
and of functions, he is enabled to handle commodities at a 
very small cost, and so to reduce prices to the consumer. 1 

The fact that there are those in the trade who wish to be 
given the opportunity to run these risks proves that there 
is profit in it, the compensation for running them entering 
into the price paid by the consumer of the finished product. 
The large interests, having a partial monopoly, could, in 
many cases, handle the risks cheaper than any one outside 
the speculative exchanges ; and, if they could get rid of the 
competition of the exchange risk-takers, they could add 
this risk-taking function as a department to their business. 
The reason, therefore, that they seek to do this is the same 
reason that moves a large company with abundant capital, 
or in affiliation with promoters who know where they can 
get large capital, to enter any field that promises profit of 
itself, and which at the same time helps to give complete 
control of the market for its particular specialty. 

The competition of the risk-takers upon the exchanges 
is most effective; for the service that is offered can be con- 
ceived of, not merely as a by-product in the ordinary sense, 
but something that is produced in such quantities that 

1 It is true that many traders take advantage of the fact that specula- 
tive markets exist, and use them to make their gambling deals in. That 
aspect of the case, however, belongs to the other side of the ledger and is 
treated of in the chapter on "Moral and Social Value." 



INDIRECT EFFECTS 171 

there is anxiety to get rid of it. For the unskilled specula- 
tors are seeking to run risks, not from true businesslike 
consideration of possible costs and income, but from false 
hopes, and because the mere excitement of running risks 
gives them pleasure that otherwise would come from gam- 
bling games in which the hazards are purposely created. 
Elsewhere the question will be discussed as to whether, from 
a moral point of view, advantage should be taken of the 
gambling propensities of the traders. For the present it is 
sufficient to say that the willingness of the gambling traders 
to take these risks exists as a psychological fact, and forms 
a part of the machinery of the speculative exchange. The 
result is that ventures are taken with slight cost, and, in 
many cases, with no cost, to the consumer. 

Another circumstance that reduces the cost of taking risk 
upon the exchanges is that one party, in hedging against 
possible risk, may be the unconscious instrument whereby 
another party upon the opposite side of the market is also 
hedging. As an illustration, let us suppose a miller who 
has made a contract to deliver a given quantity of flour at 
a certain time. In order that he may fulfill his contract 
without bearing the risk of fluctuations in the price of his 
raw material, he buys wheat futures as a hedge until the 
time when he is ready to purchase the actual wheat of the 
grade that he wishes for milling. At the same time an ex- 
porter has bought wheat for shipment abroad. To insure 
himself against a decline in the world value while the wheat 
is in transit, he desires to sell futures as a hedge. Thus it is 
seen that the exporter has but to sell a short contract, and 
the miller to buy the same, in order that both parties may 
be hedged. Even under present conditions with the enor- 
mous number of purely speculative deals in the market, it 
is doubtless true that trades, such as that just suggested, 
frequently take place. One business man by buying fu- 
tures as a hedge will be giving the very opportunity needed 
for another business man to hedge by selling futures, both 



172 VALUE OF ORGANIZED SPECULATION 

sides of the deal being accomplished without the direct in- 
tervention of the speculator. But it is the market furnished 
by organized speculation, and made continuous through 
repeated buying and selling by speculators, which gives 
the facilities whereby dealings of the different classes 
of business men are utilized in many cases to hedge one 
another. 

It would be impossible to prove by statistics that the ac- 
tion of the speculative markets, as above explained, is to 
save costs, for the reason that, those who conduct a par- 
ticular business do not confide to the public, or to officials, 
or even to business associates, the exact profits that they 
make, or their various costs. Different methods of book- 
keeping show divergent results in regard to these matters, 
and even the head of a business may not fully understand 
the balance-sheet or the manner in which the accounting 
is done. Nevertheless, some well-known instances will be 
called to mind in which the opinion of those in a position 
to know has been expressed either by their acts or their 
utterances. 

The recent discussion of the increased cost of living 
throws many side lights upon the question in hand. If 
the whole subject were not such a serious one, the numer- 
ous changes of fortune which have befallen the different 
parties to the controversy might cause some amusement. 
About fifteen or twenty years ago, the farmer was the one 
who complained the loudest, and, whatever the cause, the 
prices of his products at that time were most inadequate. 
At present the situation is exactly reversed; and the agri- 
culturalist for several years has gathered excellent crops 
and received a good price for them, while the city worker is 
wont to complain of the high cost of living. Fifteen years 
ago the party which felt most aggrieved was saying that 
the price of agricultural products had gone down without 
commensurate decline in salaries and debts; while at pre- 
sent the party which has the public ear is protesting that 



INDIKECT EFFECTS 173 

Wages have not risen in proportion to the price of food. To 
this latter the farmer rejoins that, so far as the advance is 
concerned, he does not get the benefit of it, since the price 
paid the farmer for his cattle, for instance, is not high 
enough in proportion to the price at which dressed beef is 
selling. 

It will thus be seen that there are three parties to the 
controversy — the producer of the raw agricultural pro- 
ducts, the consumer, and the manufacturer; while those 
who wish to be popular hardly know what position to 
take in the matter. Referring again to the question of the 
profits of those who manufacture meat products, the im- 
pression became so widespread some years ago that their 
profits and the consequent cost to the consumers were high 
that an investigation was directed by Congress. From the 
report, which was made by Commissioner of Corporations 
Garfield, it would appear that the profits of the packers 
were not excessively high. However, it may be said, in 
passing, that many still cling to the idea that there is some- 
thing abnormal in the margin between the price paid for 
the raw material in the meat industry and the price of the 
completed product. It would carry this essay too far afield 
if an attempt were made here to discuss the profits of the 
packers or others, and hence the report of Mr. Garfield will 
be assumed to be correct. But there is no one who con- 
tends that these profits are especially low or that they 
have suffered any material decline since the introduction 
of organized speculation. The significant fact, therefore, is, 
that in this business, which pays at least as high as the 
average profits, the raw material — the hogs, cattle, sheep, 
and other live stock that the parties buy — are not dealt in 
according to the future system upon the speculative ex- 
changes. On the other hand, many of the finished pro- 
ducts, such as pork, lard, and short ribs, are so dealt in. 
But if the contention of the writer be correct, that the mar- 
kets of the speculative exchanges tend to raise prices part 



174 VALUE OF ORGANIZED SPECULATION 

of the time, then is seen the importance of the fact that 
the packers buy outside the speculative exchanges and sell 
in an exchange market. 

In contrast to the business of the packers, let us consider 
the wheat milling industry. In this business, the raw 
material is the subject of active speculation upon the ex- 
changes, while the completed product is not. It would ap- 
pear in regard to this business that, while it has expanded 
with the growth of the country and the prosperity of the 
millers, the system of trading in futures upon the ex- 
changes has adversely affected it, and that the profits of 
the business are not so great as formerly. In a hearing be- 
fore a Congressional committee, Mr. Pillsbury said : — 

"The universal rule used to be that the miller generally 
accumulated wheat, say when the farmers were putting in 
their surplus rapidly. The universal rule, almost, used to 
be that you could buy the wheat cheaper at that time than 
at any other time, and you could make a fairer profit on 
the actual holding of the wheat than you could at such times 
when these movements of the farmers were less . . . 

"The miller before could generally use his good judg- 
ment and make money by the rise of wheat. I would state 
a fact, which perhaps would be a surprise to most of your 
committee, that I have no doubt the milling interests in 
this country, taken as a whole, in the last ten years have 
paid the farmer more money for wheat than they have 
gotten out of him. That is the fact through the Northwest. 
I think I can count on the fingers of my two hands the one 
hundred and fifty milling firms, say ten years ago, in our 
part of the world, and I think that is true all over the coun- 
try, that there are only a few millers who, by using the 
highest triumphs of milling and the best executive ability 
and producing the best brand of flour, have been able to 
make anything. The immense competition and capacity 
of the mills of this country has doubled three times the 
amount of flour they can make and it is [sic] got right down 



INDIRECT EFFECTS 175 

the last few years to the question of the survival of the fit- 
test; but there was a time when they could always run on a 
profit, years ago, by buying wheat in the fall, say on an 
average at $1 a bushel, and we were almost sure to make a 
good profit by carrying it until the time when the state of 
the roads, etc., prevented the deliveries being so large. I 
look on short selling as being the greatest impediment on 
the profit of the milling business in that way." 1 

Considering this testimony, the fact is called to mind 
that most profits have been reduced in recent years, and no 
one wishes the milling business to be placed on a less pro- 
fitable basis than other forms of industry which have no 
special advantage. Yet, when it is remembered that the 
speculative exchanges have not been imposed upon the 
country at the behest of any arbitrary power, but have 
grown up by voluntary association as a natural develop- 
ment, it may be questioned whether the particular indus- 
tries that they affect should be freed from their action any 
more than from that of any other factor. 

The effect of the speculative exchanges, or of any factor, 
upon profits in any line, may eliminate some form of sur- 
plus that might otherwise have developed. But it cannot 
make the profits of a business so small that capital will be 
diverted from it to some more lucrative field and the popu- 
lation of the country be reduced to the necessity of eating 
whole wheat in its unmilled condition. Every one knows, 
however, that the milling business is one of the prosperous 
and expanding industries of the country. Hence in this de- 
partment of the world of commerce, the speculative ex- 
changes appear as regulators of costs and profits ; and we 
find them directing a particular trade so nicely that the 
profits of the manufacturer have been reduced, with a 
corresponding reduction of the price of the finished pro- 
duct to the consumer; and yet the business itself has not 

1 Testimony before the Committee on Agriculture, House of Representa- 
tives, 1st Sess., 52d Congress, p. 193. 



176 VALUE OF ORGANIZED SPECULATION 

suffered any diminution of output, but has gone on ex- 
panding, developing, and serving the public. 

From the very nature of things, as shown above, the 
speculative exchanges tend to cut down costs. As a result 
of their activities, the purely speculative business gives a 
good income to the commission man, and the handling of 
the actual commodities appears in the similitude of a by- 
product, and hence is done very cheaply. All forms of in- 
surance save cost, and hedging upon the exchanges is very 
similar to insurance. By thus rendering it safe for a nu- 
merous class of dealers of moderate capital to enter the 
field, much capital is utilized that would not otherwise be 
available. Furthermore, many of the risks are run, not be- 
cause the speculators have good reason to expect commen- 
surate profits, but because of the love of excitement and 
the gambler's illusive hope of gain. Hence, in the case of a 
large part of the risks, the risk-takers get no compensation 
for taking them. Finally, the risks are eliminated by the 
special action of a free competitive market which serves 
strongly to counteract the tendency toward monopoly in 
large business houses, especially in those cases in which 
the raw product is kept at the highest possible price by 
speculation upon the exchanges, and the completed pro- 
duct is sold in a market in which there is little organized 
speculation. 

The Husbanding of Resources 

Among the complementary advantages of greater stabil- 
ity in prices afforded by speculation is that of the husband- 
ing of resources. The necessity for an intelligent and rea- 
soning demand for a commodity need not be enlarged upon. 
Such a demand should, of course, consider future wants and 
supplies as well as present conditions. In the case of per- 
ishable articles the demand is limited to a particular time; 
and calculations which determine their price are hastily 
and roughly made. But with a market of the breadth and 



INDIRECT EFFECTS 177 

scope of the wheat market, a coordinating force is highly 
advantageous to provide among other things that a supply 
be kept over from the fat years for use during the lean 
years. 

Acting from his own selfish motives, and yet for the good 
of the community, the speculator notes the probability of 
crop failure in the midst of present abundance, and his 
purchases tend to put up the price at such a time. But the 
rise in price diminishes consumption to some extent, with 
the result that a part of the supply is husbanded till a time 
when it is more sorely needed. The purposes just men- 
tioned can be accomplished to a greater or less degree by 
any form of speculation, but through organization this 
function is perfected and better facilities are afforded. 
Here, as in other instances, the effects of speculation are 
not always what are to be wished, as the high prices brought 
about by it often attract a larger reserve than is necessary. 
However, it is better that reserves should be larger than 
necessary than that they should be too small, and any error 
in this respect is almost certain to be on the side of safety. 

Publicity 

The peculiar kind of organization effected by our ex- 
changes is a model in its way. It is an organization where 
each of the units combined is free to act independently, 
and which does not hinder, but facilitates competition. In 
this respect it is quite different from other kinds of com- 
mercial organizations, which, whatever their good qualities, 
tend to stifle the individual. Further, the organization ac- 
complished by the exchanges gives free play to the expres- 
sion of opinion by any trader and the widest publicity to 
all statistics and facts bearing upon the speculative markets. 
All transactions in the pit must on the face of them be 
open and aboveboard. Any member may see and hear the 
transactions made; and the ticker service, provided by 
organized speculation, is not intended to keep the terms of 



178 VALUE OF ORGANIZED SPECULATION 

a transaction secret, but to spread them in every direction; 
the quotations, as fast as made, are given to telegraphers 
who send them to the thousands who take the service; and 
newspapers are given every facility to print the quotations. 
Except in the case of bucket shops and a few rivals, each 
exchange wishes to get its quotations before the people 
as widely as possible on account of self-interest, if for no 
other reason. 

The gathering of news, which is furthered by the ex- 
changes, is also of great assistance in spreading intelligence 
of price-making factors. There are those who advocate pub- 
licity as a remedy for any evils that might appear in the de- 
velopment of corporations and of the trusts. Such persons, 
if they wish to see the actual working of their remedy, do 
not need to go any farther than the speculative exchanges. 
Transactions openly made are ingrained in the very nature 
of the exchange idea; and organized speculation is pub- 
licity itself. 

Summary of the Chapter 

The indirect effects of the facilities afforded by organ- 
ized speculation upon the world of commerce exhibit its 
value in a better light than the direct effect of fixing prices. 
While the prices made are subject to criticism in that they 
are often artificial, the business of the exchanges is so 
closely articulated to the outside commercial world that it 
works with the utmost smoothness in relieving the business 
community of many of the uncertainties of business. 

The speculative exchanges furnish a continuous market 
in which all transactions can be liquidated during exchange 
hours. This important service makes Wall Street the cen- 
tre of the financial system, as it is the only place in which 
financial error may be atoned for and freely liquidated. It 
gives stability to the loan market, and renders possible the 
enormous business of lending upon stocks, securities, 
warehouse receipts, and other collateral, its excellence as 



INDIRECT EFFECTS 179 

an agency in facilitating this business being indorsed by 
the banks. The stock exchange does not cause panics, but 
saves us from the worse effects of them, as it bears the bur- 
den and takes the responsibility when the worst results of 
financial excesses are threatened. 

The exchange market, not only for commodities but for 
securities, furnishes the place where hedging in all its var- 
ious forms may be best undertaken. It serves to knit to- 
gether all business and gives a wide field to the principle of 
insurance. It is especially valuable in giving the small busi- 
ness house the necessary security in doing business, so that 
it may compete successfully with its larger rivals. 

The exchange gives free play to the modern principle of 
specialization. It produces a world market where broad 
conditions are given due weight, and which serves as the 
basis of all markets, but it leaves to local influences the spe- 
cial task of adapting these world prices to the conditions of 
a particular place. The prices fixed upon the exchanges, 
from the broad vision of those who make them, serve well 
to direct commerce in its important divisions, and, in the 
course of trade as reflected in market quotations, a pro- 
phecy is given in regard to business conditions which it 
would be well for all to heed. The speculative process re- 
duces costs and husbands resources, building up a stock of 
commodities for use in case of crop failure or other disaster. 
The means adopted to accomplish this purpose are of the 
most modern type. Publicity is a prominent feature; 
and the central idea in all the activities of the exchange 
is to give free play to commercial forces, to unite without 
restricting, to promote solidarity without crushing the 
individual. 



CHAPTER V 

MORAL AND SOCIAL VALUE 

The affairs of this world are so regulated that a utility will 
often be created even out of something which in its nature 
is vicious. As the saying is, "There is no great loss with- 
out some small gain." The opposite also is true, that a 
beneficent agency may be accompanied by counteracting 
influences which nullify even the best commercial tenden- 
cies. 

Speculation of itself is not wrong; it is helpful, not injur- 
ious, to the country. The speculator performs a useful 
service in relieving others of certain important risks; and if 
the speculative exchanges furnished facilities for this, and 
this only, there would be little criticism of them. But com- 
ing with the legitimate speculator, we find his counterfeit 
and imitator, the adventurer, a gambler who enters the 
speculative markets for the principal purpose of gratifying 
that love of excitement which he craves. Thus the specu- 
lative exchanges are so perverted from their true commer- 
cial purpose that they pander to one of the most depraving 
of human instincts. 

The Gambling Spirit 

It is well known that the spirit of adventure that leads 
one to risk his money merely for the excitement of taking 
risks is one of the most persistent of anti-social forces. This 
spirit may be gratified in different ways; and the many 
who have the unnatural craving seem to be ever watching 
for an uncertainty on which to hang a bet. A gambling 
game may be played for the purpose of making uncertain- 
ties, but any fortuitous event may be utilized. For in- 



MORAL AND SOCIAL VALUE 181 

stance, we may have betting upon the weather or an elec- 
tion, and, in the speculative markets, we have a series of 
fluctuating prices which afford all the uncertainties which 
the gambler so passionately desires. Nor is it necessary to 
go through the form of making an actual bet. Where 
there is organized speculation, the gambler has merely to 
give his order either to buy or sell, put up his money, and 
straightway he finds himself enjoying the excitement of a 
gambling game. 

For the evil which comes from such a transaction is not 
due necessarily to its exact terms, but rather to the spirit 
with which the enterprise may be entered into. If the 
terms of an agreement were the actual criterion for decid- 
ing upon its nature, then a contract of insurance would be 
a bet; for, in such case, the insured simply stakes a sum of 
money against a larger sum according to the doctrine of 
chances that he will die within a specified time. Yet insur- 
ance is everywhere recognized as most valuable both from 
the individual and from the social point of view, and, for 
obvious reasons, is seldom resorted to for gambling pur- 
poses. 

On the other hand, it is quite possible to gratify the 
gambling spirit, even in transactions where there is actual 
delivery of a commodity. In short, the writer takes the 
position that the question of actual deliveries is not the 
criterion which determines whether an institution is socially 
valuable. The greatest injury can be wrought upon the 
moral welfare of the business community where the gam- 
bling spirit is fostered, even though there be no actual 
gambling in the strict sense of the word. 

If an enormous elevator were built at the side of the Chi- 
cago Board of Trade, and if each trader were assigned a bin 
in that elevator, and then, by the use of the telephone and 
powerful machinery, the actual wheat were delivered to 
each trader in his bin as quickly after buying as deliveries 
are made in a retail store, the moral nature of the trans ac- 



182 VALUE OF ORGANIZED SPECULATION 

tion and the social injury wrought would not be changed a 
particle. The speculator and the speculator's family would 
suffer as great a wrong, and the commercial world would be 
as much injured, if the money were lost in transactions 
where a commodity is delivered as where it is not delivered. 

Or, considering the stock market, does any one hold the 
idea, because stocks are delivered on the next day after a 
trade is made upon the New York Stock Exchange, that 
therefore trading upon that exchange is more moral than 
upon the European bourses, where the deliveries are longer 
deferred and trades more frequently carried for the account? 
Indeed, most experts would take the opposite view, and 
would hold that, owing to the greater daring and reckless- 
ness of American speculators, the New York Stock Ex- 
change is a more potent factor for evil than the slower-going 
bourses of the Old World. 

Or again, let us consider forms of business other than the 
speculative kind and the manner in which they are con- 
ducted. Many business men are most reckless about what 
among speculators would be called the size of their margin. 
In other words, they have an extremely small amount of 
actual property in proportion to their indebtedness. Hence 
they meet, in most cases, with disaster. But, perhaps sav- 
ing something from their creditors, they enter the field of 
business again, running as large an estabishment as the 
use of their credit will allow, only, of course, to meet dis- 
aster as before. Still the fallacy of their methods is not re- 
alized. Again the business man is ready to risk all he can 
lay his hands on. Money is borrowed from friends on re- 
presentations that are often fraudulent, and yet another 
time the infatuated seeker after riches is led to failure, 
while, in some cases, his reckless adventures are only ended 
by suicide. 

The infatuation for doing business, when the business 
man lacks the proper qualifications, is just as pitiful, even 
though he trades in actual commodities with actual deliv- 



MORAL AND SOCIAL VALUE 183 

eries, as the adventuring spirit of the gambling speculator 
upon the board of trade, who puts off deliveries for sev- 
eral months in some cases, and, in most cases, makes none 
at all. 

It is not necessary to consider extra-hazardous forms of 
business, such as hunting for gold or oil in paying quantities. 
Even agriculture has its full quota of those who risk all in 
reckless ventures. The prospective farmer will emigrate to 
some untried section of the country, going in debt for his 
farm, tools, and live stock, with only a small equity (mar- 
gin) to protect him from the results of miscalculation; thus 
staking everything upon a bountiful season, and reaping, 
in most cases, the harvest of misery which his gambling 
spirit entails. About fifteen or twenty years ago there were 
many riskers of this sort. Certain sections of the country, 
which were thought adapted to agriculture, were found 
susceptible to drought, and at the same time the prices of 
agricultural products were low. The adventure of trying 
to cultivate those lands was not proving a success, and the 
same kind of misery that comes to the unfortunate specu- 
lator was the lot of those ruined men who slowly dragged 
themselves back to the more settled and fertile parts of the 
country. 

It is impossible to form a correct opinion about the real 
evil of organized speculation if we stick to the criterion of 
whether deliveries are or are not made. It is not objective 
phenomena that lie at the basis of the social injury; and 
those writers who undertake elaborate descriptions of specu- 
lative methods, showing that a certain number of deliver- 
ies are made, with a view to demonstrating the worth of 
speculation viewed as a social factor, are but wasting their 
efforts. Any kind of adventuring is likely to lead to human 
misery if the adventurer risks all he has and is not able to 
make a wise choice in the selection of his undertakings. 
Every business man owes it to himself, his friends, and his 
family so to order his business policy that each risk that he 



184 VALUE OF ORGANIZED SPECULATION 

takes is founded upon an intelligent consideration of actual 
conditions; he should never undertake any business enter- 
prise unless he has enough resources to give the undertak- 
ing a fair chance of success and to leave him in case of fail- 
ure with sufficient means to make a new start. If he risks 
all recklessly, he is but taking the gambler's chance, and is 
almost certain to reap the gambler's harvest of financial 
ruin. 

A Charge that is True 

There is, however, one charge against the speculative 
exchanges that must be admitted. The general effect of 
their advertising and personal soliciting of business is to 
make the taking of reckless risks attractive. Thus some of 
them knowingly endeavor to make that which is really 
extremely difficult appear easy. The brokers are as a class 
rather above than below the average business man as 
regards personal honesty. The weak point in their moral 
armor is that they are in a business in which almost every 
one loses; and they encourage the people to trade, well 
knowing the probabilities are that such speculations will 
prove unprofitable. 

An article appeared some years ago in "The Independ- 
ent," entitled "The Confessions of a Stock-Broker"; and 
the editor of that periodical makes a notation in the way of 
preface that it was written by a well-known stock-broker 
whose name, for obvious reasons, should not be known. In 
the confession the broker states the attitude of his house as 
follows : 1 — 

"Our office partner, when asked by a client for an 
opinion, usually ascertains what it is the client wants to do 
and then gives him such arguments in favor thereof as 
seem to him to be good — unless, as occasionally happens, 
there are really strong arguments on the other side which 
seem to him to be sufficiently important to warrant him 
1 Vol. lxi, pp. 1468-1469. 



MORAL AND SOCIAL VALUE 185 

interfering for the customer's own good. This does not 
often occur, but it does sometimes, and our ' office partner ' 
has more than once prevented a customer from doing 
something foolish — at the cost of a brokerage. 

"We admit that people who speculate will, in nine cases 
out of ten, lose money if they keep at it. We admit that we 
cannot guide them with any certainty in their market opera- 
tions. We admit that we want as many customers and as 
many brokerages as we can get. And yet, if a man came to 
us and said that he wanted advice as to whether he should 
speculate or not, — he knowing nothing about it, — I 
think we should candidly advise him not to do so if he 
could not afford to throw away the money he proposed to 
risk (which no man in his heart expects to do), but we 
should also say that if he insisted upon speculating we 
should be glad of his business. That about represents our 
attitude. People will speculate and will lose their money, 
whether we do their business or not, and we feel that we 
might as well do their business as let some other firm do it. 
When people speculate with us, we do the best we can to 
help them to be successful, but our best, we must admit, is 
very small." 

The above quotation is not inserted because it is thought 
that an anonymous article in a popular magazine is an 
authority upon a subject, but rather because the article 
well expresses the attitude of the better class of brokers 
and commission men. It would be beyond the purpose of 
this essay to discuss as a question of pure ethics the 
broker's position. The reader is left to consider the moral 
aspect of the situation according to his own ideas of right 
and wrong. It will only be called to mind that some 
brokers are not so scrupulous as the one just quoted; that 
some of them send out circulars in which every encourage- 
ment is given the intending speculator; and that, in conver- 
sations about their offices and elsewhere, they are continu- 
ally urging the most reckless ventures. 



186 VALUE OF ORGANIZED SPECULATION 

To be perfectly fair about the matter, however, the ques- 
tion may well be asked whether our moralists are prepared 
to take the position that it is wrong to urge any one to 
engage in a business in which there is a possibility of suc- 
cess, even though the chances are that it would prove disas- 
trous. There are other forms of business in which commodi- 
ties are actually delivered, where the same moral question 
arises, and it is needless to say that great difference of 
opinion exists. Some take the position that a sane person of 
mature age should be competent to make his own choice in 
regard to his business enterprises; while others hold that 
temptation should not be thrown in the way, even of those 
supposedly able to make an intelligent decision. 

Considering the question as a social problem, however, 
we cannot fail to note that this host of brokers, even though 
they may, when their advice is frankly asked, tell an in- 
tending speculator to leave the market alone, are yet in 
possession of effective persuasive powers, which are used 
with little restraint in getting business. The market review 
written by those skilled in attracting a clientele, the ele- 
gantly furnished offices where all is so comfortable and 
where the most plausible theories for making money are 
constantly heard, and the gambling instinct so deftly pan- 
dered to — all combine to cause the ruin of many who 
would otherwise continue as useful members of the com- 
munity. Organized speculation as it exists is a terribly 
persuasive power, which unsettles the judgment even of 
intelligent persons, and, appealing to certain common 
weaknesses of human nature, leads thousands every year 
to the ruin of a gambler's life. 

Corporate Dishonesty 

Wall Street and the corporations are so intimately con- 
nected that to the minds of most people they are synony- 
mous terms. Yet the two are in reality distinct. There may 
be, and have been, scandals concerning the management of 



MORAL AND SOCIAL VALUE 187 

corporations, and yet not a word of that scandal has been 
reflected upon the stock exchange itself. So, too, the mani- 
pulations of stocks by Wall Street speculators have no 
necessary connection with the management of corporations. 
The president or other officers of a railroad company, for 
example, may all be engaged with some problem of con- 
struction and equipment at the very time when there are 
important bull and bear movements upon the exchange. 

Nevertheless, it must be admitted that there is great 
temptation for the officers of a company to speculate in its 
stocks, and to use their private information as a means of 
furthering their own interests in a speculative way. The 
temptation is all the greater from the fact that it is the 
business of the higher officers of a corporation to attend to 
its finances; and the borrowing power is increased, and the 
credit of the corporation made better, if the stock be so 
esteemed that it sells at a high figure. The management 
may detest the methods of the stock manipulator, but they 
can hardly do aught to discourage him, when they know 
that he is seeking to enhance the value of the property for 
which they have become responsible. 

It is difficult to draw the line as to how much interest the 
corporation manager should take in stock exchange quota- 
tions. To some extent he is forced into the market by the 
very process of conducting the finances of the company; 
but, being in, he may be gradually led into some of the 
practices of the stock manipulator, even to the dishonest 
expedient of seeking to depress the value of the stock of the 
very corporation that he has been selected to protect. 

This actual destruction of property, fraud or robbery, 
according as it is viewed, cannot be too strongly con- 
demned. It is the worst form of the combination of specu- 
lative activities with positions of trust. The instances 
where it occurs are much rarer than is popularly supposed; 
and with the growth and systemization of commerce, and 
with publicity and interest in large corporations, there is not 



188 VALUE OF ORGANIZED SPECULATION 

so much of it as formerly. The corporation wrecker, even 
if he succeed in making a profit by his wrecking tactics, 
must find some place to invest his gains; and his invest- 
ment of them gives him such a stake in the prosperity of the 
country that it is not for his interest to seek to depress 
industrial conditions. 

But whatever relation there may be between the tempta- 
tions afforded by the stock exchange markets and corporate 
dishonesty, the connection is by no means a necessary one. 
Probably the most numerous cases of fraud and misman- 
agement are such as have been found among corporations 
that are not listed upon the exchange. Thus the managers 
of a corporation may so conduct it that the stock becomes, 
or appears to become, valueless, in which case it may be 
purchased from the ruined holders for a song. It requires 
no stock exchange to accomplish' this familiar process of 
freezing out. 

Another form of mismanagement which has no connec- 
tion with the exchange is that whereby a corporation man- 
ager, acting in his fiduciary capacity, deals with himself as 
an individual in such a way as to give himself the best of any 
bargain or contract entered into. This highly discreditable 
form of dishonesty must be carefully distinguished from 
any possible evils furthered by speculative exchanges. It 
can readily be practised by any one occupying a position of 
trust in a corporation whose stock is not sold upon an ex- 
change, or even in the case of an ordinary business partner- 
ship. Nevertheless it must be admitted that the system of 
short selling that prevails on the exchanges furnishes special 
facilities and temptations to resort to dishonest methods. 
Thus the corporation wrecker may sell the stock of his 
company short, and make a profit on the decline, in addi- 
tion to the other forms of profit just mentioned. 

Considering the question again in its larger aspects, there 
is no one about a stock exchange, whether it be broker, 
corporation manager, or speculator, who really benefits 



MORAL AND SOCIAL VALUE 189 

in the long run from corporate mismanagement or any 
form of disaster. The stock exchange thrives upon pros- 
perity; and it is more likely to be optimistic than to be the 
reverse. It depends upon security, and the profits of all are 
increased if the corporations whose stocks and bonds are 
dealt in can be relied upon; and, especially, if their manage- 
ment be sound. 

The exchange, then, should be, and is, the great pro- 
tagonist in favor of honesty in corporate management. 
One way in which it helps to accomplish this result is by its 
system of listing stocks for trading. Before a stock may be 
traded in upon the New York Stock Exchange, it must be 
examined by a committee; and if the stock does not meet 
the requirements of the committee, it is not listed. The 
reason for this can be none other than that the traders have 
an interest in seeing that the corporations whose securities 
they deal in are honestly managed and the securities 
properly issued. If the members of the stock exchange 
knew their own interests as well as they ought to know 
them, this requirement would be made more exacting. 
However, the changes in this regard are in the nature of 
progress. The worst abuses and by far the most glaring 
frauds perpetrated upon innocent investors have been in 
securities which are not traded in upon the exchanges. 

False Rumors 

There is a method, however, by which the officers of a 
corporation may cause market fluctuations without neces- 
sarily affecting the physical condition of the property in 
their charge. It consists in spreading false rumors in 
regard to the corporation, and at the same time scalping 
the market by the aid of the fluctuations so caused. For 
example, the speculative director may make a short sale of 
the stock of his company. If the market goes against him, 
he may get out at a profit by starting a false rumor. He 
may, perhaps, remark to an acquaintance that the com- 



190 VALUE OF ORGANIZED SPECULATION 

pany will probably be obliged to issue bonds very soon. 
The acquaintance thus becomes possessed with the idea 
that he has a "tip" from an insider and spreads the rumor, 
even though he may have been told not to tell it. The 
rumor is soon the common talk of the street, and the stock 
quickly falls. The speculative director then covers his 
short and goes long, for he knows that a reporter for a 
newspaper or news agency will be likely to interview him 
or some of his associates in regard to the matter. When the 
reporter arrives at the office of the company, the rumor is 
of course indignantly denied, which denial at once goes out 
on the tape; and our speculative director finds that he has a 
profit on his long stock as well as the profit he has already 
reaped upon his short sale. This method of scalping the 
market by those in a position to know the condition of a 
particular stock, and able to affect its selling price by 
spreading false rumors, is of course wrong from a moral 
point of view, although it does not accomplish the purpose 
by the more clumsy or brutal method of wrecking the 
corporation. 

Frequently the hopes and fears of the speculator are 
wrought upon by keeping up an air of mystery. There are 
vague hints of "melons" that are about to be cut and of 
"plums" for the expectant stock -holder; for it has been 
noticed, by those who study his psychological nature, that 
he is more affected by mysteries and sensational develop- 
ments which can be easily grasped by the mind than by 
detailed statements of facts and figures which require study 
to understand. 

An important feature of general policy may be shrouded 
in mystery for months; and all this time the directors may 
be milking the market by spreading false rumors so that it 
will move backward and forward according to their wishes. 
When the day for decisive action arrives, the directors will 
go into session, the market fluctuating rapidly all the time, 
reporters waiting outside the directors' room to hear the 



MORAL AND SOCIAL VALUE 191 

news, and messenger boys hurrying back and forth carrying 
the orders of the directors now to buy, now to sell, accord- 
ing to the tips which are continually going out to influence 
the market fluctuations. 

Sometimes the directors of a corporation surprise out- 
siders with some startling cowp> as by declaring a dividend 
when least expected, or by changing the policy of the com- 
pany by paying out, in the form of a dividend, a larger 
proportion of the earnings than was anticipated. A par- 
ticularly notable case of the sort just mentioned occurred 
some few years ago and is familiar to all Wall Street men. 

Any corruption by legislators is likely to take a different 
form from that of influencing quotations with a view to 
scalping the market. Still the question has been raised 
whether it is proper that the ticker should occupy a place 
in capitol buildings; and brokers have been fined for con- 
tempt and imprisoned because they refused to reveal the 
names of some of their clients. 

There is nothing which obliges any person occupying a 
position of trust to speculate. But the market, being al- 
ways ready on every business day and being systematized 
so that it is most sensitive to every rumor, supplies facilities 
for scalping to those who can influence it; and it can be 
easily influenced by any one occupying high official posi- 
tion in a corporation. 

The Crop Killer 

But it is not merely in the matter of the management of 
corporations that organized speculation gives facility for 
lying and the spreading of false rumors. The markets for 
commodities do not give opportunity for that betrayal of 
trust which is seen in the case of the speculative director; 
but, as for doing business upon the strength of lies deliber- 
ately made, the manipulator of the wheat and cotton 
markets is perhaps even worse than his prototype upon the 
stock exchange. The most usual method of manipulating 



192 VALUE OF ORGANIZED SPECULATION 

the market for agricultural products is by exaggerating any- 
unfavorable conditions which the farmers may have expe- 
rienced, such as drought, storms, and other catastrophes. 
This "killing of the crop," as it is called, is the favorite 
device of the manipulator, because of the nervous appre- 
hension existing about possible crop failures and the man- 
ner in which the uncertainties of crop conditions readily 
lend themselves to exaggeration. 

The manipulator, especially when he finds the commodity 
selling on an export basis or near it, loads up with a large 
quantity. His interest is to advance the price, as he knows 
that it can be more easily put up than down. But when no 
particular calamity falls upon the crop, one must be imag- 
ined. It is here that the crop killer makes his appearance 
and does his work. 

In any year, even of bountiful crop, there will be damage 
in some sections of the country; and, on the foundation of 
local damage, the most terrible calamities are predicted. 
The different experts set off for the region that is supposed 
to be in danger. They travel over it and continually send 
in reports of the most doleful character. Their reports 
come out in brokers' circulars and on the tape and are 
printed in the newspapers. But when the time for harvest 
comes, it will usually be found that the damage has been 
much exaggerated and excellent receipts will come in, even 
from the region in which the crops were supposed to be 
greatly injured. So utterly misleading are most of these 
crop reports furnished by interested parties that the ques- 
tion of crop reporting has become a joke; and it is the com- 
mon remark to be heard on 'change that no reliance can be 
placed upon them. Yet it pays to send out these deceptive 
reports, as the inexperienced, and to some extent the 
experienced, speculator may be deceived by them. 

The government report, which comes out once each 
month during the growing season, is much more reliable, 
and, of course, is eagerly watched for. But, even in the case 



MORAL AND SOCIAL VALUE 193 

of the government report, scandals are not unknown. Un- 
fairness is most frequently charged in the matter of letting 
certain parties know the percentages of crop conditions 
before others. Different times of the day have been set for 
the giving-out of the report in order, if possible, to diminish 
the speculative excitement. Thus it is that these squabbles 
among the speculators, together with their charges and 
recriminations, fix upon the onlooker the impression that 
the standard of morality among them is not particularly 
high; and, when he realizes that it produces such men as 
these, may arouse grave doubts even of the value of organ- 
ized speculation. 

It then appears that lying is taken as a matter of course 
upon the exchanges; and the general effect of all this trick- 
ery and deception is demoralizing in the extreme. So 
common is lying among speculators that an air of suspi- 
cion pervades the dealings. Every one about an exchange 
seems to be watching every one else, either to detect some 
fraud in others or to make some kind of a grab himself. All 
of which shows that, if organized speculation be not gamb- 
ling, it has many of its morally depraving features; and the 
undoubted services of our organized markets are offset by 
the undesirable features which come in with them. 

Some Discrepancies and Contradictions 

The different practices of organized speculation and the 
imitations of it are not the same in their moral significance 
and their effects on general social conditions. The bucket 
shop is not, properly speaking, speculation of any kind. 
But it possesses the outward appearances of a broker's 
office; and it is difficult at first for a trader to ascertain 
whether his deals are bucket-shopped or whether pur- 
chases and sales are actually made upon an exchange. In 
markets furnished by organized speculation, deliveries 
are made, and such markets have great effect in establish- 
ing prices for the articles traded in. The bucket shop, how- 



194 VALUE OF ORGANIZED SPECULATION 

ever, has nothing to do with real commodities or securities, 
except that the names and forms are used; and there may 
be large bucket-shop operations without affecting to any 
degree actual trade. 

The crossing of trades occurs where a broker has an order 
to buy and one to sell a particular commodity or security 
at the same price and at the same time, but for different 
clients, and executes the orders by entering one against the 
other. This practice is illegal, as our law does not allow any 
one to be the agent for both the buyer and seller in the 
same transaction; and it throws temptations in the way 
of the broker which might be abused. The rules of ex- 
changes are not the same upon the matter, but it is for- 
bidden in most of its forms. When it is realized, however, 
that a large commission house has numerous orders both 
to buy and sell coming in during exchange hours which 
must be executed rapidly, and that it may have several 
partners or employees in the pit executing orders, it is seen 
that some form of crossing trades is almost unavoidable. 
In this connection the fact might be noted that in Euro- 
pean bourses and in financial and banking houses that deal 
in stocks on the Continent, some of the common practices 
bear a strong resemblance to what we in America would 
call bucket-shopping and crossing of trades. 

Bucket-shop deals, the crossing of trades, and legitimate 
exchange trading almost imperceptibly shade into one 
another; and it is no wonder that opinions differ as to ex- 
actly where the lines should be drawn. But those who con- 
tend, as many do, that there is no difference between them, 
are not reasonable in their argument. One might as well 
attempt to prove that there is no difference between a 
plant and an animal because scientists have difficulty in 
some cases in determining whether a particular specimen 
belongs to the animal or vegetable kingdom. 

Privileges constitute another interesting feature of specu- 
lative trading, the social value of which can only be justly 



MORAL AND SOCIAL VALUE 195 

estimated by using the nicest discrimination. If a prospect- 
ive purchaser of real estate is not certain whether he 
wishes to buy a particular property, he will, in some cases, 
get the owner to give him the refusal of it — that is, to 
hold the offer open for a time till arrangements and investi- 
gations can be made and conclusions reached as to whether 
it is possible or advisable to purchase. Such an agreement 
is frequently put in writing in a form enforcible by law. 
The prospective buyer of the land and the actual buyer of 
the option will, for instance, pay $10 for the privilege of 
buying for, say $5000 at any time within, say sixty days. 
The principle of such a contract, which real estate men call 
an "option," is the same as what exchange speculators 
term a "call." And yet that which real estate dealers con- 
sider a perfectly legitimate business operation is looked at 
with horror when done upon a speculative exchange. 

A "put" is the opposite of a "call"; for, if a trader owns 
a put he has the privilege of selling, or putting, a certain 
commodity or security at a specified price within a certain 
time. Yet these privileges, when dealt in on an exchange, 
are prohibited by law and by special rules; and officers and 
members, who see no wrong in ordinary exchange trading, 
frequently denounce them as pure gambling. But why it 
is that that which is right when done in handling real es- 
tate, is wrong when done in handling grain, is difficult to 
understand except from a practical standpoint. 

For what is the way in which these contracts are used in 
practice? A trader will buy a put on July wheat, say at 
90. Then he will watch the quotations during the day, 
hoping for a chance to "buy against it"; for he knows 
that, if the market goes low enough, his broker will accept 
the put as margin or security for a deal in the particular 
future. In case the market does not go as low as expected, 
the trader only loses the amount paid for the put, and has 
enjoyed the pleasurable anticipation of high possible gains. 
Occasionally such hoped-for profits are actually realized, as 



196 VALUE OF ORGANIZED SPECULATION 

the market will go into the put and move backwards and 
forwards several times during the day, enabling him by 
scalping the market to ^ake a large percentage of profit on 
his small investment. The exercise of ingenuity in plan- 
ning the scheme, and directing the operation during the 
day's market, afford just about the amount of opportun- 
ity for thought and exertion which some traders wish; 
while the possible profits, so seldom reaped in practice but 
so large in comparison with the amount ventured, afford 
full play for that deceptive confidence — that hoping 
against hope — which is such a prominent characteristic 
of the mental processes of the speculator or gambler. 

It is possible to imagine uses for privileges in a legiti- 
mate transaction in stocks or futures. They could be used, 
for instance, as a hedge or insurance; but, while the forms 
of hedging described in the early part of this essay are 
practicable and are used extensively by flour-millers, cot- 
ton-spinners, and others, privileges give but an imper- 
fect protection and are highly expensive. Thus, suppose 
a trader has bought a wheat future at 90. If he buy a put 
to protect the purchase, there will be some spread. Let us 
assume it to be one cent and that the put was purchased 
at 89. The privilege will then do the purchaser no good till 
that figure is reached; and it is the exception, rather than 
the rule, when the market goes in the puts. The market 
may close a fraction above 89; and it may be necessary to 
purchase another put for the next day, which may turn out 
to be as bad an investment as the first. And it is quite pos- 
sible to have an extreme decline, with the market closing 
above the puts each day, in which case the purchaser loses 
money on the long wheat and has the puts to pay for in 
addition. 

Considered, however, as a question of practical morals, 
and from the point of view of the social value of organ- 
ized speculation, privileges must be considered as doing 
more good than injury to the community. The reason is, 



MORAL AND SOCIAL VALUE 197 

that, if the unskilled trader must speculate, it is better he 
should do it through privileges, since he knows in advance 
just how much his possible loss will be, and is not led into 
venturing enormous amounts of money which he needs for 
other purposes. 

The Test 

In making the test and forming some estimate of the net 
value of the speculative exchanges as factors in the world 
of commerce, it is not fair to make the comparison on the 
assumption that business methods are of spotless purity 
elsewhere. Every group of business men, or of any men, 
have faults; and these faults are frequently peculiar to the 
calling of the particular group. As illustrations, attention 
might be called to the fact that adulteration is practiced in 
many kinds of manufacture, and that poison has been 
placed in articles intended for human food, even in such as 
are never sold upon the board of trade. 

Furthermore, the speculative exchanges have certain 
virtues, and the men of Wall Street and of La Salle Street 
have, in some respects, an even higher standard than pre- 
vails elsewhere. In the matter of doing as agreed, the 
brokers are most scrupulous. Contracts involving enor- 
mous sums of money are entered into in the midst of 
the wildest confusion; and it may be truly said, in making 
the comparison, that a word or a nod upon the floor of an 
exchange is better than a bond entered into elsewhere. 
There is not that evasion in carrying out contracts which 
is found in other lines of business. 

The members of speculative exchanges submit many of 
their misunderstandings that might otherwise develop into 
suits at law, to the arbitration of a committee, which does 
away with a considerable portion of the legal forms and 
red tape of judicial procedure. And the rules of the ex- 
changes, which the members submit to, bind them to a 
higher standard of business scrupulousness and cover more 



198 VALUE OF ORGANIZED SPECULATION 

points of commercial honor than are contained in any legal 
code. The grading of commodities is arranged for either by 
law or by exchange rules which are generally fair; and, refer- 
ring to the sales made by sample, it is remarkable with 
what facility they are effected and how few quarrels result. 
It must, indeed, be confessed that there is a great deal 
of deceit and bluster in all kinds of business. The differ- 
ence in this respect would seem to be that the wrongdoing 
in organized markets is greater before a contract is made; 
but, after a contract is entered into, the exchange members 
are more scrupulous than business men upon the outside. 

A Summary 

Summing up, however, and looking at the question in all 
its different aspects, it must be admitted that the business 
of the speculator is not one which, in its present develop- 
ment, gives the moral discipline seen in other forms of 
trade. The particular fault of speculation is the fact that 
it nurtures the gambling spirit. It gets men into the habit 
of seeking to take advantage. In ordinary business trans- 
actions it is generally supposed that all parties to a contract 
are benefited. A contrary impression prevails upon the 
speculative exchanges, for it is supposed there that what 
one party makes, the other party loses. This impression is 
frequently a false one, as has been shown heretofore. But 
the transactions upon the exchanges in which both parties 
profit are exceptional, and the minds of the speculators 
are too often fixed upon some sort of trick or illegitimate 
form of gain. 

Speculating upon the exchanges is not necessarily gam- 
bling, but it has, in some cases, the evils of gambling. There 
is the same disposition to get something for nothing, the 
same temptation to cheat in order to make a venture suc- 
cessful. The average speculator upon the exchanges is 
always losing, but he is not willing to admit that any part 
of his losses is due to his own folly; so he throws all the 



MORAL AND SOCIAL VALUE 199 

blame upon others, and soon becomes fully educated in the 
school which assumes that he has a right to cheat when- 
ever he can. 

The injury which speculation does to the individual is 
recognized on every hand. Positions of trust are usually 
barred to the man who speculates. Business men know 
that the temptations which beset one upon the exchanges 
are such that many are unable to resist them. Everywhere 
the instances of those who have been led to commit crime 
by reason of speculation are brought to our attention. The 
newspapers often conclude the story of a defalcation or 
suicide by the statement that the crime was committed 
as a result of speculation; and similar instances of ruined 
lives come so frequently under the observation of every 
one that such statements are taken as a matter of course 
and need little verification. 

When any one seeks to get a bond for the faithful per- 
formance of trust, one of the questions asked is, "Do you 
speculate? " The writer knows of a case where a reference 
wrote, "I give this man the highest recommendation in 
every respect except that he will speculate." The indem- 
nity company refused, even in such a case, to give the 
bond. While holding no brief for the speculative ex- 
changes, and while trying in no degree to minimize their 
faults, let us seek a historical explanation. 

A Historical Explanation 

In the evolution of business, the student will frequently 
note that, as each new type makes its appearance, it seems 
to bring with it some form of abuse or perversion to which 
it is especially subject. But as time goes on, and business 
men come to understand the new activity, and come to 
give it its proper place in the commercial system, many of 
these abuses disappear. The inertia of human institutions 
seems to cast a shadow of prejudice over any new form of 
activity; and those who enter into an enterprise, which has 



200 VALUE OF ORGANIZED SPECULATION 

not been fully recognized as necessary and productive, are 
not likely to be in all cases the most scrupulous or conserv- 
ative in the community. Hence, looseness in morals is 
more prominent in those forms of human activity which 
have not been fully tried out in the school of experience. 
Much time is necessary, it would appear, to build up 
around any business a code of laws and customs to protect 
the trade. 

Examples of this prejudice and of the unscrupulous 
manner in which a new form of business is conducted are 
numerous. The introduction of the modern factory sys- 
tem was accompanied by grave evils, child labor being the 
most conspicuous. Yet there is a pronounced tendency, as 
the factory system has progressed, for child labor and other 
evils to be eliminated. The lending of money, too, was 
thought at one time to be a disgrace, and usury laws, even 
at the present day, are a relic of this prejudice. 

Speculation is as old as commerce, but organized specu- 
lation is a recent growth. It is true, the germ of speculat- 
ive exchanges can be traced to the ancients; but it is little 
over a century since trading upon the stock exchanges has 
assumed great prominence as an economic development, 
while trading in commodities on a large scale for future de- 
livery is hardly half a century old. The abuses which were 
found with organized speculation from its start are such as 
might be expected to find lodgment in a form of business 
which so closely resembled gambling. Hence the evolu- 
tionist sees nothing at which to be surprised in the history 
of speculative exchanges or the faults to which they are 
subject; and he notes that there have already been reforms 
which are proceeding in regular evolutionary order to right 
abuses. For there is growing up about the speculative ex- 
changes, as well as in other forms of business which are in 
the early stage of development, a code of customs and laws 
and a fund of experience which will in time adequately 
restrain the crudities which are now so prominent. 



MORAL AND SOCIAL VALUE 201 

Let the pessimist take from the shelves of his library 
"Chapters of Erie," by Charles Francis Adams, Jr.; let 
him note the period when the events narrated occurred; 
and he cannot but be impressed with the fact that in former 
times there were more unscrupulous financiers than at 
present. 

If we compare the evolution of different forms of com- 
mercial activity, we find organized speculation developing 
later than most of the other forms. We find it beginning 
low in the scale, and when we compare it in its infancy with 
industries that have already had thousands of years to de- 
velop, it suffers from such a comparison. But speculation 
is all activity and searching, and the investigations which 
it brings about reform not only itself but other kinds of 
business. It was the spirit of speculation and the facilities 
offered by our organized markets which urged on some of 
the investigations into corporation frauds two generations 
ago. It is organized speculation, sobered and made con- 
servative in our markets, that has demanded precautions 
to make that speculation safe; and which, in its searching 
process, will weed out the corporations that are improperly 
managed. 

Speculation in commodities, having assumed its pre- 
sent form at a later period and being less understood, has 
not progressed so far in its evolution as speculation upon 
stock exchanges. Hence most of the complaints at present 
are leveled at the grain and cotton exchanges. Corners, 
for instance, are at the present day more numerous upon 
such exchanges and manipulation is probably more fre- 
quent; although here again the principle of newness ap- 
pears in a reverse position, for it is seldom that new com- 
modities are introduced into speculation, while new issues 
of securities are frequently made with the many abuses 
which attend their marketing. 

Summing up the historical explanation, it may be said 
that organized speculation is a form of business which has 



202 VALUE OF ORGANIZED SPECULATION 

been introduced in comparatively recent years; and, like 
most new forms of business, it has certain moral and social 
abuses connected with it. Great progress has been made 
in eliminating these abuses, since the conservative specula- 
tors find that it is for their interest as a body to remove all 
risks possible. Furthermore, speculation is a force of great 
activity, which rapidly reforms, not only itself, but other 
kinds of commerce. 



CHAPTER VI 



THE ALTERNATIVE 



A Natural Development 

Organized speculation has its evils. No one has attempted 
to deny that fact. These evils are extremely serious, as they 
involve the moral development of the commercial world. 
Hence, in computing the value of organized speculation, we 
find that, in its most important aspect, it exists as a dis- 
utility. Admit what its advocates claim for it, — that it 
steadies prices, that it fixes the values on which all com- 
merce is based, that it specializes functions and puts the 
risks of the community on a special class which voluntarily 
undertakes them, — yet, if it be shown that its net effect 
makes toward moral degradation, it can have no real value 
to any one. 

But a system of conducting commerce which has grown 
up as a natural evolution cannot be lightly put aside; and 
when an attempt is made to turn backward the course of 
development, it is frequently found that the evil features of 
an institution persist while the excellent ones perish or are 
modified. If the present status of an institution or an in- 
dustry be taken as the only factor which determines whether 
or not it should be swept away, then many of our present 
arrangements would be doomed. For instance, it might be 
called to mind that, in the modern system of manufacturing 
food products at large factories, poisons have been placed 
in the packages put up. But poisons are destructive of 
human life, and human life is more important than pro- 
cesses of production. Hence might follow the conclusion 
that it would be better for us to go back to the original state 
in which each family produced its own food. But such a 



204 VALUE OF ORGANIZED SPECULATION 

reductio ad absurdum shows the falsity of the above argu- 
ment. It is the same with speculative exchanges as with any 
form of evolutionary development. They cannot be swept 
aside by any fiat, legislative or otherwise. 

The Problem 

The problem is so to reform organized speculation that it 
will not lose its place as a step in human development, and 
at the same time to strike at its distinctly evil features. 
This is the same problem that presents itself in connection 
with many another social institution; and, to the impatient 
reformer, this alternative is most disheartening, because it 
is readily seen that it is impossible for the people to learn 
how to use the perfect instrument of a fully developed 
commercial system without a change and further evolution 
in human nature, which at the least would require centuries 
of time. And those who rashly seek sweeping reforms are 
likely to attempt the abolition of features that are not a 
direct cause of evil, but which, on the contrary, are essen- 
tial to organized speculation as it exists. If a proposed 
reform should strike at an essential principle, it would, if 
adopted, so bind and cripple operations upon the ex- 
changes that we could have no really free market. 

For the underlying principle of organized speculation is 
not that of a government or board organization which may 
be conceived of as acting in a body to determine the course 
of prices. On the contrary, the word organization and its 
derivatives, used in this connection, refer to the fact that a 
number of men are so united that they may act individu- 
ally to determine prices through their knowledge of the de- 
mand and supply. The organization is formed to remove 
friction and to provide a perfectly clear field on which 
there can be the freest interplay of the different commercial 
forces. 

Buying and selling, then, must be free if progressive 
organized speculation, as usually understood, is to be 



THE ALTERNATIVE 205 

retained. A trader, for instance, should be allowed to buy 
before he sells and so to speculate upon the bull side of the 
market. On that point nearly all are agreed; but some are 
of the opinion that the speculator should not be allowed to 
sell before he buys, and so to speculate upon the bear side. 
Yet a market in which a trader could not speculate in that 
way would not be a free market. 

A Crippled Market 

Considering other kinds of business, it is seen that the 
dealer has the right to sell before he buys and that short 
selling is by no means uncommon. If the same freedom be 
not allowed upon the exchanges, the result is only a crip- 
pled and distorted form of organized speculation; for the 
fact cannot be too often adverted to that it is impossible to 
constitute a market solely for buyers or solely for sellers, 
and if you cripple the selling power, you cripple also the 
buying power. If speculative short selling be shut off, the 
number of speculative buyers is thus necessarily reduced, 
because buyers will not habitually resort to a market in 
which sellers are not free to act. If the sellers are limited to 
those who have heretofore bought, the market is of too 
restricted and narrow a character to be called an organized 
market in the modern sense. If short selling were abolished, 
our speculative exchanges as they exist to-day would also 
be abolished. It is not a supposedly ideal state that might 
exist under the conditions suggested, but rather the actual 
alternative which would be likely to exist, that should 
engage the attention of the practical reformer. 

Monopoly 

Examining the business houses as they compete with one 
another in the field of industry, it is noticeable that they 
are by no means of equal strength. Indeed, the greatest 
diversity exists in regard to their size and in regard to every 
other element which makes for power in the commercial 



206 VALUE OF ORGANIZED SPECULATION 

world. The large business houses are usually those which 
have been successful in performing some service, whatever 
it may be, more cheaply or efficiently than their competi- 
tors. Thus a young man, by entering the field in a particu- 
lar business, by saving his profits and adding them to his 
capital each year, and by inducing others to associate them- 
selves with him, may finally cut so important a figure that 
his house is said to have a monopoly or semi-monopoly in 
its line. Furthermore, smaller business houses, each having 
had greater or less success, may unite; and the combination 
may do so much business that it comes to be generally 
regarded as a monopoly. Yet the principal reason why a 
large combination occupies an important place in a par- 
ticular industry is because it can accomplish a service more 
cheaply or more efficiently than others can. 

If the business conditions in a particular line are made 
so attractive that excessive profits are reaped, then there 
is always potential competition ready to assert itself. For 
instance, another large corporation enjoying a preponder- 
ating influence in another industry may conclude to extend 
its activity and enter the field which presents such allure- 
ments. 

The business conditions which furnish the best oppor- 
tunity for a competitor to enter the field are found in cases 
where the selling price of the finished commodity has been 
forced to a high level, or where the purchase price of the 
raw material is very cheap. When such conditions exist, 
competitors of all kinds are likely to appear. Even a small 
business house has certain advantages which enable it to 
enter a particular field and compete on equal terms with the 
large company or trust; and there have been notable in- 
stances where small business houses acting separately have 
been so well managed, — their managers having personal 
supervision and direct interest in conducting the business, 
■ — and they have been organized upon such a sound finan- 
cial basis, that they have actually driven a trust, which was 



THE ALTERNATIVE 207 

supposed to have monopolistic power, into bankruptcy and 
ruin. 

There are advantages and there are disadvantages in 
conducting business upon a large scale; and, at the same 
time, there are advantages and disadvantages of an oppo- 
site nature in smaller enterprises. But what is an advant- 
age in one form of organization may be a disadvantage in 
another. Thus the manufacture of goods in large quanti- 
ties can be so systematized that the large manufacturer has, 
in that respect, the advantage as regards efficiency over his 
smaller competitors; but, on the other hand, the more care- 
ful supervision given the process of manufacture by the 
small business house may have quite the opposite tendency. 

The views above expressed, as to the adequacy of natural 
business tendencies to furnish an ultimate settlement of the 
trust problem, are by no means shared by all those who 
discuss the subject. Yet it is believed that the reason why 
many writers and speakers are of the opposite opinion is 
because there are so many abuses whereby a trust profits 
which are considered normal as a matter of course, but 
which, nevertheless, are unfair when considered from an 
ideal standpoint. 

To examine each industry in detail, to note how a surplus 
arises to this factor or to that factor, to point out the 
methods of reform which will give to e^ch its just reward, 
putting all on an equality and yet securing perfect mobility 
and every feature of the competitive system, is the most 
hopeful and the best opportunity for field work in the 
entire realm of economics. An inquiry which sought thus 
to prove inductively the thesis stated would, let it be 
emphasized, be a detailed one; and the investigator would 
find in many cases that a factor had an influence quite dif- 
ferent from that generally supposed. If the sweeping 
generalities and prejudices which becloud the subject could 
be got rid of, it would be found that a system might be 
devised whereby competition would work so justly that the 



208 VALUE OF ORGANIZED SPECULATION 

gross inequalities seen at present would many of them dis- 
appear. In the meantime a proposition may be stated on 
which all will agree, — one which brings us to the point 
where the question of monopoly touches the question of the 
value of organized speculation. 

No small business house in its competition with the trust 
or large company should be deprived of any help or agency 
which exists as a natural part of the world of commerce. 
No law should be enacted, no system of tariff or taxation 
should be forced upon the people, giving the large com- 
pany any power to destroy its smaller rival which does not 
belong to it from its natural efficiency or economy in sup- 
plying its service. Furthermore, the legislator should be 
especially careful not to destroy any agency which already 
helps to put the small business house on an equality with 
its larger competitor. The above considerations are suf- 
ficient to show the point at which the question in hand 
touches the general field of economics; and affords, it is 
believed, a sufficient basis for a discussion of risk-taking as 
it comes into relation with the question of monopoly. 

Among the democratic influences of commerce which 
have grown up by voluntary action, and which serve to 
give the smaller business house advantages equivalent to 
those enjoyed by the large company, is the custom of in- 
surance. A man with vast business interests does not need 
insurance so much as small operators, because his interests 
are usually so distributed that a fire would not be likely to 
destroy all of his plants at one time. But, by the aid of in- 
surance, the small business man may undertake venture- 
some business enterprises and compete with the large com- 
pany or trust on more favorable terms. 

The speculative exchanges, as they are utilized in the 
process of marketing and distributing commodities, con- 
stitute a kind of underwriting organization in its broader 
sense, and render it possible for men of moderate means to 
engage in a wide field of business operations. If this form 



THE ALTERNATIVE 209 

of insurance were abolished or crippled, many of them 
would find no profitable employment for their capital or 
their activities, and only those would remain who have 
sufficient capital to insure themselves. 

The speculative exchanges deal in commodities or securi- 
ties of uncertain value, and are so articulated with the 
commercial system that the business houses which are pro- 
ducing and distributing these commodities can be relieved 
of the risks which come from changes in price in different 
periods of time. But, in the absence of this form of insur- 
ance, the small merchant or manufacturer could not with 
safety continue his dealings. The alternative naturally 
offered is that of a large business house with numerous 
branches which would assume the risks and conduct the 
trade. 

Such a business enterprise would naturally take the 
modern form of a corporation or trust and would be able 
to look at things from a different standpoint from that of the 
small business man. It would be possible for it to gain con- 
trol of the production of a commodity, and to handle all the 
processes from the raw stage to the completed product as 
it enters into consumption. A company of this sort would 
make the packages in which the product of its plant is to be 
carried; and, if the commodity were bulky, it would have 
much to do with its transportation in the various stages of 
manufacture. A company with such a wide control could 
dictate prices within certain limits, and hence would not be 
subject to many of the risks of the small business house. 
Whether such a system be advantageous or not, where it 
naturally grows up without adventitious aid, it will be 
recognized on all hands that it should not be allowed to 
establish itself by forcibly destroying the insuring or con- 
serving institutions which would otherwise give the small 
business man a chance to compete on an equality with his 
larger rivals. 

Turning to the wheat trade as an instance, if the small 



210 VALUE OF ORGANIZED SPECULATION 

buyer could not have his insurance against fluctuations in 
price, he would be at a distinct disadvantage. No one, in 
such a case, could engage in the business of buying and 
carrying wheat unless he had a large amount of capital 
which he was willing to use in this manner. The people 
who would naturally undertake this function would be the 
large millers and exporters of the cereal. They would enter 
into this branch of the business because, in the absence of the 
facilities afforded by the exchanges, they could take these 
risks with less cost than any one else, as they would have 
greater control of the flour market and of the movements of 
wheat, and are affiliated to some extent with the different 
transportation and distributing interests. Through their 
influence in these directions and by the direct aid of the 
factors of commercial power within their control, they 
could reduce much of the risk. But much of it would still 
remain for which they would need to be compensated; 
and they would get such compensation under the laws of 
competition. 

At present most of the cost of risks in the prices of com- 
modities traded in on the exchanges are paid in the ulti- 
mate analysis by the amateur speculators who run these 
risks because of their gambling instincts, and who, seeking 
to win from others, lose their own money. The losses of the 
unskilled speculators go, part of them to pay the commis- 
sions, interest, and other charges, but another large part 
goes to pay the penalty of buying at high prices and selling 
at low prices. 

This enormous sum of money, consisting of the losses of 
the amateur speculators over and above the cost of main- 
taining the machinery of organized speculation, is highly 
important in this discussion; and the places to which it 
goes should be dwelt upon and emphasized. This money 
is lost, partly because of the weakness in human nature and 
partly because of market manipulations set on foot with 
the express purpose of getting it. But the market manipu- 



THE ALTERNATIVE 211 

lators do not get all of it by any means. In the babel of the 
pit, no one is certain as to exactly who may be the principal 
in a deal which a broker is offering to make. Thus an ad- 
venturing speculator, in his usual gambling way, may put 
over an order to buy, say 10,000 bushels of wheat, and his 
broker will bid for it. The wheat may be bought of another 
adventurer or gambling speculator or of some professional; 
or it may be bought from a producer of the cereal who will 
afterwards deliver it, thus marketing his commodity, we 
will say, at a good price. In this way, under our present 
system, the unsuccessful speculator pays the penalty. He 
pays the commissions and charges; and he pays most of the 
profits which the successful speculator gets; and he pays 
the difference between normal prices all the year round and 
the higher prices which prevail part of the year by reason 
of the corners and squeezes upon the exchanges. 

If, however, the present system of handling commodities 
of rapidly fluctuating values were done away with, and the 
business undertaken by a monopoly, it would be con- 
ducted upon a strictly business basis. There would be no 
greenhorns, or amateurs, or unsuccessful speculators to 
pay expenses or profits to any one. A corporation having 
its grip upon the market for the raw material and for the 
completed product could at times suffer large losses and 
still be able to show excellent average yearly dividends 
upon the additional capital invested to carry on this de- 
partment of the business. 

In so far as the returns on capital are the compensation 
for risks undertaken by the monopoly, no one will question 
that it should be compensated, it being, under the condi- 
tions supposed, the best agency at hand to bear these risks. 
But the question is relegated to the citizen to determine, 
whether he be in favor of having the risk undertaken by a 
monopoly in this way, the compensation for it of course 
entering into the price of the commodity to the consumer, 
or whether he prefers the present system, under which the 



212 VALUE OF ORGANIZED SPECULATION 

risks are borne by a distinct class of capitalists set off for 
such risk-taking, many of whom make no net profit at any 
time, and who pay, not only the expenses of conducting the 
exchanges, but the profits of the manipulators and higher 
prices to the producer as well. 

We have here a most interesting question of practical 
ethics combined with an economic problem. It is not the 
purpose of this essay to discuss any purely ethical ques- 
tion, but merely to point out the place at which individuals 
find themselves in such a position that they are obliged 
either to deal or to refuse to deal with persons who are 
acting in a non-ethical spirit. 

Personally the writer holds the opinion that it is not 
morally wrong for the community to avail itself of the 
commercial advantage of dealing with a set of traders, even 
though these traders may be acting in the gambling spirit 
or from other uncommercial motives. To carry out any 
other doctrine consistently would require that our legisla- 
tors interfere with industry at every hand, such, for exam- 
ple, as the production of commodities which might, or 
might not, be used for the good of the community. 

As shown in other parts of this essay, the demoralization 
of speculation is not necessarily more than that of any busi- 
ness in which there is the gambler's chance of success or 
failure. Risks are necessary; and the mere fact that traders 
insist on taking them when they are not properly equipped 
for such an undertaking should not cause us to turn a free 
market into one which is not subject to the competitive 
principle. 

For the problem in this case is different from that which 
is ordinarily presented in the question of monopoly, so- 
called, versus a free market. Under present conditions the 
large company and its affiliated interests find themselves 
underbid in many cases by the risk-takers upon the ex- 
changes. If the trust could perform the service with less 
cost than it could be performed upon the exchanges, then it 



THE ALTERNATIVE 213 

would be able to drive them out of business or leave them 
as pure gambling institutions. But the large company can- 
not do this. It cannot bid as high prices for the commodity 
to the producer, and it cannot run these risks as cheaply for 
the community, as they are run by the speculators upon the 
exchanges. For many of the speculators run the risks for 
nothing, being driven to it by the love of gambling or specu- 
lative excitement afforded by the system of organized 
speculation. Hence we have a case in which the opponents 
of monopoly can make a stronger showing than they usu- 
ally do. For we have here the inchoate trust or large com- 
pany actually asking, not only that it be allowed full liberty 
to devour its weaker competitors singly, but that the law 
step in and actively assist it in so gaining a mastery. The 
strong and unharmed Horatius, not satisfied with the 
stratagem of separating his wounded opponents and slaying 
them one by one, calls on the arbiters to step in and fight 
his battles by butchering his enemies for him. 

Such a demand as this needs but to be stated to show its 
unreasonableness. It is true that, under existing institu- 
tions, instances may be pointed out in which the state or the 
people collectively do take sides against smaller economic 
units and assist the monopolists in driving them to the wall. 
Nevertheless, all reformers who seek after commercial 
freedom should exert themselves in the opposite direction. 
The doctrine ought to be advanced that any unfairness 
in taxation or elsewhere in our present laws must be abol- 
ished so that a free field with no favors can be extended to 
the different economic factors. But the present condition 
of affairs should not be altered by striking down any fac- 
tors which are distinctly competitive in their nature. 

The speculative exchanges are distinctly competitive. 
They are voluntary organizations in which the economic 
units move over one another with the facility with which 
the molecules of a liquid body arrange and readjust them- 
selves to suit the more rigid bodies which surround them. 



214 VALUE OF ORGANIZED SPECULATION 

With all their faults they constitute the chosen field upon 
which the larger and smaller units have a chance to com- 
pete under approximately equal conditions. 

A Four-sided Contest 

In the case of some industries, the trust or quasi- 
monopoly exercises its power with such discretion, and 
respects the rights of others with such discriminating care, 
that it does not pay for outsiders to enter the field. Such a 
trust, powerful alike by reason of its size and of its tactful 
management, may in some cases overshadow a speculative 
exchange that stands in its way. It would thus deaden 
speculation and relieve itself of the disturbing influence of 
the exchange. There are, however, but few instances in 
which a trust is able to accomplish this result. 

The sources from which the speculative exchange de- 
rives its power are not the same as those which lie at the 
basis of the influence of trusts; for the men who specialize 
and make trading upon the exchanges their business are of 
a different type or temperament from the monopolist or 
would-be monopolist. The men who trade upon the ex- 
changes, whether they be amateurs or manipulators, are of 
the speculative type of mind. They are of the type of men 
to whom uncertainties are pleasant, whether it be the legi- 
timate risks of business or the purposely created hazards of 
gambling games. 

Trusts, however, are formed by those who wish to escape 
risks and who place their interests in the hands of the spec- 
ulative promoter, because he tells them that he will put 
them in such a position that they will be able to control the 
situation in their particular industry. For, back of all the 
formalities in the organization of a trust, we find first a 
number of business men who are dissatisfied with the price 
that they are getting or the price that they are paying; 
and they are combined by some man of nerve and energy 
who bears the burden of most of the risk and worry. The 



THE ALTERNATIVE 215 

promoter of a trust, then, is a man who performs for the 
constituent companies the same service which the specu- 
lator performs for business men in many lines, — that is to 
say, he relieves them of certain risks. And he, quite unlike 
the men that he unites in a trust, is affiliated with stock 
exchanges and is often a speculator himself. 

The risks entered into by those who trade upon the 
speculative exchanges are shown by the fact that very few, 
even if successful for a time, permanently secure large 
fortunes; while the cautious nature of those whose plants 
are combined into trusts is shown by the fact that they 
usually take preferred stock for their share, leaving to the 
speculative promoter the common stock, which he can use 
in operations upon the exchange. 

A man who has put his property into the trust form of 
organization may be, and often is, led into the speculative 
markets in financing the company. Nevertheless, for the 
reasons just indicated, it will in most cases be found that 
the manufacturers who control the constituent companies 
of a trust seldom become imbued with the spirit of specula- 
tion. For the psychological tendency that makes men seek 
those callings for which nature has fitted them will land one 
man in a speculative exchange as an operator there, and 
another at the head of a manufacturing house, with his 
interest centring in methods of production and in fixing 
prices which buyers must pay, rather than in profiting by 
fluctuations in price. 

As a result of these psychological tendencies, we have the 
facts alluded to above — that a powerful company seeking 
after a monopoly will, wherever possible, crush out or 
cripple an exchange dealing in the commodity which it 
attempts to control. But most exchanges are of a lusty 
growth, and usually overshadow any attempt at monopoly 
which may appear. As before explained, the operations 
upon the exchanges are determined by the fact that most 
traders are amateurs, and that the large operators and 



216 VALUE OF ORGANIZED SPECULATION 

manipulators are men such as understand how to work 
upon the gambling instincts of the amateurs and so get 
their money. Hence we have two battles going on at once. 
There is the battle on the floor of the exchange between the 
amateurs and the professional speculators, and there is the 
battle taking place everywhere between the large company 
and its smaller competitors. Two influences, each of which 
has a powerful tendency toward artificial prices, have each 
a separate foe. But these influences are antagonistic to one 
another, and their foes also are antagonistic. Besides the 
battles above referred to, there are numerous minor strug- 
gles and cross-currents in this swaying mass of competing 
economic units. But the contest, at least in some of its 
aspects, assumes the form of a four-sided battle in which it 
is impossible for any party really to gain the mastery. 

In the hearings before the different Congressional com- 
mittees that have investigated the expediency of anti- 
option laws, and in articles in newspapers and elsewhere, 
we frequently find the arguments of large companies or 
trusts which seek to exercise a preponderating influence in 
certain industries. In these arguments the attentive stu- 
dent of human nature will discern a note of impatience if 
not of anger on the part of men who were accustomed to 
having their own way about things, but now had come in 
contact with a force offering many obstacles to the accom- 
plishment of their designs which they did not understand. 
Thus it would appear that a man of high integrity, brought 
up in a school of business where things are done in a certain 
regular and orderly manner, who by long control of vast 
business interests has become dictatorial, perhaps showing 
more of a dictatorial spirit than he ought to, cannot conceal 
the fact that he is somewhat ruffled at the cavalier manner 
in which he and his interests have been treated on the 
speculative exchanges. 

This incompatibility with something which balks his 
well-meant desires and proceeds in such a riotously free- 



THE ALTERNATIVE 217 

and-easy manner to perplex and dash his most mature 
counsels, results in irritation; it brings clearly to his vision 
the gambling features of the exchanges, and helps to rivet 
on his mind the idea that they depress the prices of agri- 
cultural products. Hence these trust managers, many of 
whom are excellent customers for the produce of the 
farmer, become enthusiastic in their advocacy of anti- 
option laws; and seek to sweep the speculative exchanges, 
so fraught with immorality, and at the same time with in- 
dependence, from the face of the earth. 

A producer of a commodity which is sold upon the 
speculative exchanges may, if he wishes, place his crop in a 
car and ship it to the nearest market to be sold by sample 
upon the floor of the exchange; or he may put it in store 
and deliver the warehouse receipt in execution of a future 
contract. But he is not obliged to take the trouble of ship- 
ping to the exchange market in order to get the benefit of 
its facilities. The value of the product at his station bears 
a certain relation to its price at the central market; he has 
as good access as his local dealer to the exchange quota- 
tions, and can detect any tendency to conceal conditions 
or take advantage in any way. He has these quotations 
always before him, showing on what basis large transac- 
tions are conducted in the centres of trade, and is fortified 
by custom in asking that even his small transaction be 
given the same consideration as that of the larger producer 
or dealer. So well are these facts appreciated that wheat, 
cotton, and other products which are dealt in on the specu- 
lative exchanges are favorite commodities for production 
by the farmer or planter. 

Those commodities which are not dealt in for future 
delivery upon the exchanges, however, have not these ad- 
vantages, although of course there are limits to the length 
to which controlling interests may go. For instance, the 
beet-sugar factory could not afford to do business on the 
basis of an utterly unfair price for beets, because such a 



218 VALUE OF ORGANIZED SPECULATION 

course would only result in the farmer abandoning the cul- 
ture of that product in ensuing seasons. Nevertheless, in 
the case of commodities not dealt in on the exchanges, the 
buyer for the large company may on occasion show great 
independence; and, if careful to select the time, may so 
conduct his buying that the company will get the benefit 
of any surplus which might develop in particular seasons. 

Some lands are especially adapted to tobacco, to sugar 
cane, or some other particular crop; and the grower will 
endure at times unfair exactions rather than abandon the 
culture of his accustomed specialty. Tobacco, for instance, 
is a crop which is not made the subject of active specula- 
tion upon the exchanges, and there are no quotations for 
futures to guide the planter in disposing of his crop, and no 
organized market to which he could send it in case he could 
not get a fair offer from the local buyer. Hence some de- 
scription of the manner in which tobacco is bought may 
throw light on the question of trust control as an alternative 
to the dominance of a market furnished by organized specu- 
lation. The following excerpts from Congressional hearings 
contain the gist of much of them and describe important 
features of the customs prevailing in the tobacco trade as to 
buying the commodity : — 

"It has been the custom for the past four years for one 
buyer to come to a barn and make one bid on that tobacco, 
and, generally speaking, he does not come any more. He 
comes and says, 'I will give you 4§c,' or, *I will give you 
three and one/ or *I will give you something else'; and it is 
that or nothing. Most frequently we will not have another 
opportunity of selling." x 

The buyer " came to my house and made me an offer for 
my tobacco, and I knew that I had to sell, for there was no 
other way in the world to sell it, no other recourse, and I 

1 Statement of F. G. Ewing before a subcommittee of the Finance 
Committee of the United States Senate, Sen. Doc. No. 372, 2d Sess., 59th 
Cong., p. 54. 



THE ALTERNATIVE 219 

sold it to him. He was on his way to one of my neighbors. 
We had telephones in the house, and I telephoned to my 
neighbor before this buyer got to his house, and told him 
that he had better take the first offer; that unless he did, 
he would knock him down. The neighbor could not take 
the offer that day, because his share hands and tenants 
were not convenient, and he could not take the liberty of 
selling their tobacco without their consent and authority. 
So the buyer said to him, * You had better take this offer; 
when I come to-morrow I will give you less.' In two days 
from that time this neighbor went to accept the former 
proposition and he knocked him down a hundred dollars 
on a $600 crop; and, gentlemen, he kept going lower and 
lower until he got $250 below the first offer." x 

When the trade in a commodity is large enough to make 
it pay to form some kind of a trust or combination, and 
where there is no speculative exchange with its open 
market to determine prices, we have this form of trust con- 
trol. The outward appearances of the buying trusts or 
combinations are different, as particular trades are con- 
ducted according to their own special customs; but every- 
where, under the conditions mentioned, we have a buying 
trust or combination to keep prices down and control the 
markets. Live hogs, for instance, are not traded in for 
future delivery upon the exchanges, and the method by 
which they are bought when they reach the large centres 
shows the same preponderating control of market condi- 
tions which has been described in the tobacco market. Oil 
also is an example. Where the number of buyers is few, 
and the commodity regularly dealt in, the expedient of mak- 
ing some kind of arrangement whereby bidding shall be re- 
stricted is so obvious that it is idle in such case to expect 
that there will be a free market. 

Some day, no doubt, all these things will be reformed, 
and business customs and laws so changed that the buying 
1 Statement of Charles H. Fort. Ibid., p. 117. 



220 VALUE OF ORGANIZED SPECULATION 

trust will not be able to secure any unfair advantage over 
the producer. The trusts themselves may be reformed so 
that the potential competition always present may be a 
more powerful influence, or new competition may be intro- 
duced to diminish their power. No one can prophesy as to 
what will be the system in actual use generations hence. 
But, for the present, it has been abundantly shown that 
the speculative exchanges, with all their faults, do intro- 
duce an important competing element into the calculations 
of those who would like to become monopolists, and that 
the general tendency of the speculative markets is toward 
the democratization of industry, and toward giving every 
man the opportunity to do business and to work up from 
small beginnings in his particular line of trade. 

A Democratic 'Institution 

The markets furnished by organized speculation repre- 
sent the most complete development of the competitive 
system and of democracy in trade, as opposed to mono- 
poly and concentration of wealth and power. Upon the 
exchanges, any one may deal, even though he have no ex- 
tensive plant or arrangements for carrying commodities; 
and, if he trade rightly, he may feel assured that he is car- 
rying a part of the great staples of commerce, and casting 
his influence in the direction of fixing such prices that 
industry may be directed to those channels in which its 
efficiency and its economy will be most perfectly realized. 
At the same time other business men outside the exchanges 
may rely upon the option system to protect them against 
business vicissitudes which would otherwise cause them to 
abandon the field and leave it only to monopolists or semi- 
monopolists. 

Thus organized speculation represents freedom of action 
and at the same time cooperation and division of labor and 
of functions. It is the people working with separate wills 
and yet organized so completely that they accomplish cer- 



THE ALTERNATIVE 221 

tain purposes by joint action. Like a bank which gathers 
money from different depositors and then uses it, some- 
times in large, sometimes in small amounts, to further the 
business development of the country, so the speculative ex- 
changes gather the money of a number of capitalists; and, 
through the business system described herein, they furnish 
the method and the capital whereby the small dealers upon 
the outside are insured against certain losses and many of 
them enabled to continue in business on approximately 
equal terms with larger companies or semi-monopolies. 

Such are some of the ideal aspects of organized specula- 
tion considered as an alternative to monopoly and the con- 
centration of wealth and power. The faults that go with it 
are the same as those of any form of democracy or freedom. 
They originate, in their ultimate analysis, in the weak- 
nesses of human nature, especially as it seems almost im- 
possible for the average man to understand financial mat- 
ters. The troubles of the speculator are such as he has 
entered into of his own accord; for no one is obliged to spec- 
ulate. It is only when the people become so educated in 
finance, that they can appreciate and understanding^ use 
a free market, that the speculative exchanges will appear 
in their true light as the most important enemies of mono- 
poly and privilege of all sorts. 

A Monopoly of Commissions 

Notwithstanding the considerations brought forward in 
the last heading and the fact that they can scarcely be 
given too much emphasis, there is one direction in which 
they should be qualified. The cosmopolitan character of 
the exchanges and the freedom and independence which 
they promote among their members all tend toward breadth 
of vision. Hence, as a class, the members of exchanges are 
broad-minded men. Yet they are not always free from that 
narrow spirit which prevails outside; and, when the brokers 
have in mind the question of commissions, they are anxious 



222 VALUE OF ORGANIZED SPECULATION 

to exclude all those except their immediate associates from 
participation in business opportunities. No labor union, no 
trust, no monopoly or attempted monopoly can be more 
jealous of prerogatives than are the members of exchanges 
in regard to commissions. 

The important exchanges usually have commission rules 
which carefully prescribe the minimum charges on each 
class of business, and against those who appear as competi- 
tors the boycott is rigorously applied. Exchanges furnish 
their quotations to similar institutions located so far away 
that they cannot be competitors and to exchanges which 
deal in non-competing lines, but not to actual competitors; 
and benefits that might accrue to the commercial world 
from their organization are carefully held back wherever 
possible if it appear that any , share of the profits is in 
danger. 1 

It should be noted, however, that this policy is not con- 
cerned with the function of exchanges as regulators and 
directors of commerce, in which capacity their influence 
always makes for independence and against monopoly, 
but only with the compensation that brokers charge for 
their services. It may further be stated that these commis- 
sions are unimportant compared with the other business 
interests involved; that they are small compared with com- 
missions outside the exchanges; and that the spirit which 
is shown is no different from that displayed by business 
men in other lines. 

Real Gambling 

Considering now the effect of organized speculation upon 
the individual and the admitted evils and sorrows to which 
the speculator of the usual type is subjected, the question 

1 For a description of the methods used by the New York Stock 
Exchange against its neighbor the Consolidated Stock and Petroleum 
Exchange, cf. testimony before the Pujo Committee investigating the 
" Money Trust," June 12, 1912. 



THE ALTERNATIVE 223 

naturally arises as to whether there is no alternative in the 
individual case. Might not the unsuccessful speculator be 
taken from the exchanges and put to work at some calling 
to which he is adapted, thus leaving the speculative markets 
in control of those professional operators who understand 
technical conditions and who would thus promote the wel- 
fare of the people by their trading? 

In most cases the answer must be in the negative. The 
misguided unsuccessful speculators are not those who have 
entirely mistaken their calling. They are the ones who 
would naturally take the legitimate risks of the commun- 
ity and who are stepping forward to perform their intended 
function. The difficulty is that they have not the ability, 
the industry, the training, or the capital, to undertake those 
risks in the most effective manner. They are like many of 
our unsuccessful lawyers, doctors, merchants, farmers, or 
manufacturers. They are attracted toward the callings 
for which they are most nearly fitted; but, owing to defects, 
they do not meet with success. This evil of amateurism is 
further aggravated by the fact that, at the present stage of 
human development, there are very few persons born who 
can cope with conditions in the speculative markets, while 
at the same time the fascinating nature of the speculator's 
ideal makes the number of those seeking his rewards even 
greater than in other fields of endeavor. But these thous- 
ands of persons, driven on by their natural propensity to 
take risks, and this propensity further intensified and made 
abnormal by various conditions, must have some way of 
gratifying their desires; and the desires of the natural 
risk-taker, when inhibited or perverted, frequently become 
the passion of the gambler. 

If the markets of the world are closed to the speculator, 
he will seek that excitement which he craves in real gam- 
bling. There are abundant facilities at hand whereby he 
can gratify his perverted instincts; for, as rapidly as one 
form of gambling is stopped by law or passes out of 



224 VALUE OF ORGANIZED SPECULATION 

fashion, another is invented to take its place. There are 
the race-track, the hand-book, policy, and all the numerous 
forms which alternate with one another in popular favor. 
They have no redeeming features. They not only lend 
themselves to satisfy the gambling passions of the very 
poor, but work their way into every crack and corner of the 
social fabric. 

Speculations upon the exchanges, however, even when 
taken at their worst, have their services in the world of com- 
merce, and do not as readily present themselves to the poor, 
for they require in most cases larger sums of money than 
are necessary in games of chance. The broker's office is 
not a place where a man of small means would naturally 
feel at home; and the knowledge that there are places 
where one may speculate upon, the rise and fall of securities 
and commodities is not so widely diffused as is the case in 
regard to games of chance. Further, the circumstances 
which urge on the gambler carry him to greater extremes 
than in the case of the speculator. The exchange hours are 
short and are usually in the daytime. The systematic use 
of alcohol to urge on the speculator is comparatively infre- 
quent. Games of chance, too, may be undertaken even 
without any gambling-house or extensive apparatus: but 
two persons in the mood, and a few of the simplest tools are 
all that is necessary. 

Furthermore, there is use in speculation, while there is 
none in games of chance. Let us take organized specula- 
tion at its very worst, and admit that most of the deals 
made upon the speculative exchanges are mere adventures 
by irresponsible parties filled with the gambling instinct. 
Yet there are legitimate transactions as well; and even the 
haphazard dealings of the amateur speculators, which do 
so much injury to the community in every way, have re- 
deeming features and accomplish some good, all of which 
is discussed under the head of "hedging," and in other 
parts of this essay. 



THE ALTERNATIVE 225 

Thus, in considering the matter as a question of alterna- 
tives, it is seen that organized speculation cannot be carried 
to the length that gambling can in oppressing the poor and 
demoralizing the individual; and even when taken at its 
worst, organized speculation is of important indirect use 
to the commercial world, while gambling is of no use. When 
gambling is abolished, it will be time to consider the ques- 
tion of whether it be really expedient to stop speculation 
upon the exchanges. While such an alternative as that of 
gambling exists, reformers and purists might better devote 
their energies to abolishing it, rather than weaken their 
case by attacking something which has many strong points 
in its favor. 

Unorganized Speculation 

But gambling is not the only alternative which may be 
offered for organized speculation. If the exchanges were 
closed, many who now resort to them would doubtless con- 
tinue in speculation, but it would be of the unorganized 
type. Speculations could be carried on in the very commo- 
dities now dealt in upon the exchanges, but the special fac- 
ilities would be absent. As shown heretofore, such dealings 
would be much restricted compared with those which now 
exist; and they would be made in a market where bear 
speculation would be almost impossible. 

The restricted form, furthermore, is free from many of 
the evils which attend organized speculation. Probably 
it can be said with perfect fairness that unorganized specu- 
lation is less like gambling than the organized kind; 
and many persons who regard organized speculation with 
horror have no objection to speculative dealing outside of 
the exchanges. 

Unorganized speculation lends itself even in lesser de- 
gree than the organized kind to those who have but small 
capital and who wish for rapid action. The method of trans- 
ferring commodities is cumbersome; and the speculator 



226 VALUE OF ORGANIZED SPECULATION 

cannot ruin himself so quickly as in the case of organized 
speculation, since he necessarily has more time for reflec- 
tion before undertaking a deal. Furthermore, the scalping 
which prevails upon the speculative exchanges, and gives 
dealings thereon a strong resemblance to gambling, is ab- 
sent in the case of unorganized speculation. 

The important feature lacking in the case of unorgan- 
ized speculation is a continuous market in which the specu- 
lator can unload in case he changes his mind. In real es- 
tate dealings, this absence of a continuous market is keenly 
felt. The market for real estate in a particular city may 
be advancing rapidly, and the speculators with accumu- 
lated profits may be buying everything that is offered. 
But suddenly the change comes and the market is demoral- 
ized, the speculator finding himself with a piece of real 
estate upon his hands with no' demand and a heavy mort- 
gage. Then follows the slow, blood-sucking process by 
which he is tied down, perhaps, for the remainder of his life, 
with the continued round of interest, taxes, insurance, and 
other expenses. 

The writer holds no brief for the system of trading as 
it exists upon the exchanges, but in one respect at least 
it causes less social and moral injury to the community 
than unorganized speculation. For, if at any time, a specu- 
lator upon the organized markets wishes to shake off the 
gambling spell and discontinue speculation, he can readily 
do so. He may order his deals closed, or his broker will do 
that anyway if his margin be exhausted; and he will thus 
be free to quit speculation if he wishes and engage in any 
other kind of business. But the speculator in a market which 
is not continuous may be drawn on for life in the most 
hopeless grind. He finds himself with unsalable property 
on his hands, which is usually mortgaged; and, in giving 
the mortgage, the speculator has given his note. Hence, 
unless he defaults on his note, he is bound to keep on pay- 
ing interest on a debt that is much beyond his resources. 



THE ALTERNATIVE 827 

It has been the peculiar fortune of the writer to be asso- 
ciated all his life with different speculators — those who 
speculate upon the exchanges and those who speculate in 
real estate where there is no organization. He has seen in 
most cases nothing but losses and misery come to either 
kind of speculator. But the greatest misery and loss — 
the largest number of ruined lives that he has seen — have 
come from the unorganized, not from the organized, kind 
of speculation. 

Speculative Business 

It is difficult to draw the line as to where speculation 
leaves off and other trading or business begins. Any risks 
taken in a business way are considered by many persons as 
speculation. But it seems better to confine the term in its 
strict sense to the taking advantage of fluctuations in the 
prices of property, and to use the term speculative business 
to designate commercial undertakings in which there are 
great hazards, of a general nature. This kind of business 
may be considered as an alternative to organized specula- 
tion. 

We must consider human nature as it is, not as it is sup- 
posed to be. If there were not the facilities of the organ- 
ized exchanges whereby the business men of a speculative 
or gambling turn of mind could gratify their propensities, 
they would, many of them, seek some sort of speculative 
venture in the line of their own business. This, in many 
cases, would be the best alternative offered; for, if a person 
be dominated with the common passion for risk-taking, 
his recklessness would not be as likely to lead him to ruin 
in the case of a business which he knows as in one of which 
he knows nothing. Nevertheless, the risks of business are 
so great that, even in one's particular line, there is danger 
of over-extension. There is an infatuation in the business 
which one has selected as a young man and followed in 
succeeding years. When the mind is narrowed to a parti- 



228 VALUE OF ORGANIZED SPECULATION 

cular vocation, the world's different commercial interests 
are seen in a distorted perspective; and one is likely to esti- 
mate his previous successes too highly, and to place too 
great a reliance on his abilities and his resources. 

A business man once said to the writer, that, whenever a 
merchant extended his business, it was well to be suspicious 
of his credit. The remark was of course an exaggerated 
one, and was intended as sarcasm or humor rather than an 
actual working rule in granting credits; but it contains 
the germ of truth which is only confirmed by its humor. 
There have been so many cases of failure shortly after busi- 
ness extension that it would seem well worth the while of 
a credit man at least to make an investigation in such a 
case. 

In truth all business is risky, ,as is seen in the statistics of 
failures; and any one may note from the experience of his 
friends and acquaintances the great risks which all business 
houses run. Some of the most glaring weaknesses in human 
nature are shown in the conduct of businesses which are regu- 
lar and legitimate in every way. After a successful season 
the natural optimism and egotism, which exist to a greater 
or less degree in all of us, may, for the moment, unbalance 
the judgment of even the most level-headed; and at such 
a time the arguments for extension appear especially plaus- 
ible. Money has been made by a particular form of busi- 
ness operation; and what course could be wiser, it is natur- 
ally argued, than to extend the plant and facilities along 
the same lines which have proved so successful? Further- 
more, since the profit of the business is much larger than 
the current interest for borrowing money, why not borrow 
enough to extend operations and do business on a large scale 
and so make increased profits? But alas, such reasoning 
as the above has led to more suicides and more failures 
than even the speculative markets. The present season 
may not be like the last one. Hard times are always alter- 
nating with prosperity, and general conditions which the 



THE ALTERNATIVE 229 

business man cannot control are likely to result in disaster; 
while the constant shifting of commercial centres and of 
profitable lines of trade render all calculations extremely 
uncertain. 

But speculative business is not seen at its worst in the 
cases where the merchant or manufacturer extends his own 
business. The seductive glory of posing as a local capital- 
ist and of spreading into different fields is even more dan- 
gerous in its allurements. Hope characterizes the organ- 
izer of any business, whether he be a promoter selling stock 
in some large and distant enterprise, or a business man 
seeking to interest his neighbors in a local venture or in- 
vestment. 

Many a man who has done well in the business which he 
learned in his youth has put his surplus into some form of 
speculative business, and, as a result, has lost all that he 
had. At the time when some outside venture of this sort is 
contemplated, the situation seems safe enough. Even a 
conservative man may reason that in his present business 
he has something which is always safe and profitable, and 
it may appear to him that it is only his surplus which he is 
risking in the proposed enterprise where there is the possi- 
bility of the large profits such as he has heard are made by 
men of great originality and force in venturesome enter- 
prises. 

But the kind of reasoning referred to is dangerous in the 
extreme, for the new enterprise is quite likely to require 
more capital than was contemplated. It being of a specu- 
lative or venturesome nature, some of those who agreed to 
go into it may change their minds ; and those who have al- 
ready put in enough to start it may feel that they must see 
it through in order to save what has already been put in. 
Hence we find that a man who has been enticed into such a 
venture may draw on his old and established business to 
get further funds, until finally both business enterprises 
show debts and losses, and the erstwhile conservative and 



230 VALUE OF ORGANIZED SPECULATION 

comfortable merchant or manufacturer is obliged to go 
into bankruptcy. 

If it be intended to enter into any form of speculative 
venture, it is believed that it is better to resort directly to 
margin transactions upon a commercial exchange than to 
enter into speculative business. Or, as has been shown in 
a previous section, if the business man will be careful 
enough to purchase his stocks outright, or at least to have 
a large margin, he will find that the speculative exchanges 
offer a field in which he can so invest his surplus that it will, 
in most cases, serve as a second line of defense; as a help to 
him, not a burden, in case of business reverses. 

To sum up; speculative business is a good alternative 
to organized speculation in many cases, inasmuch as most 
men know their own business better than any form of out- 
side speculation or investment. But business men often 
overestimate their own powers, and hence make the great 
mistake of extending their business by going into debt in 
order to make such extension, or of entering into reck- 
less outside business ventures. If speculation upon small 
margins in the haphazard gambling spirit could only be 
eliminated, the surplus of the business man could best be 
invested in the speculative markets under the advice of an 
expert; for organized speculation if properly conducted, is 
safer than speculative business. 

Evasion 

The discussion of alternatives to organized speculation 
has been entered into with a view to showing its actual value 
to the community by imagining the conditions that would 
most likely exist were it suddenly destroyed. Looking at 
the question from a practical standpoint, however, there is 
no alternative. The only effect of a law abolishing it would 
be to restrict its operations. Let us suppose, for instance, a 
law to be enacted with a prohibitive tax upon short selling. 
Such a law if enforced would mean the abolition of an 



THE ALTERNATIVE 231 

essential feature of organized speculation; and, to those 
who believe that an institution can thus be destroyed, 
would appear final. 

But that belief is a most deceptive one. To find illustra- 
tions we do not need to confine ourselves to this country, 
with the power in its courts to declare null and void any 
act of the legislature which they may deem contrary to the 
constitution; but, to take restriction at its best, we can 
refer even to Germany — a country where laws are strictly 
enforced, and in which, so it happens, measures of a similar 
character have been enacted. 

The German anti-bourse law of 1896 not only had the 
government behind it, but it was backed by public opinion, 
especially by the agrarians and others of power and influ- 
ence. Yet the law was evaded, and had an effect very dif- 
ferent from what its supporters had intended. Some of the 
forms of evasion which the Germans found effective are de- 
pendent upon their peculiar customs, — for instance, upon 
the fact that the banks in Germany play a larger part than 
they do here in the buying and selling of securities. There- 
fore no attempt will be made to describe the special cus- 
toms of which the Germans availed themselves in picking 
out particular features of the law to evade. We in this 
country could not use all of these methods; but the Ameri- 
cans could be depended upon to invent new and interesting 
schemes of evasion that would be even more effective than 
those which the Germans adopted. 

Furthermore, when other methods appear too cumber- 
some or difficult, there would remain at least the favorite 
method by which the Germans evaded their anti-bourse 
law; namely, that of trading in a foreign exchange. The 
Germans used Amsterdam, Paris, London, and other for- 
eign markets. In this country, if we had an anti-option 
law, and if some attempt should be made to enforce it, 
the grain speculator would substitute Toronto or Winnipeg 
on the letter or telegram, while the speculator in stocks or 



232 VALUE OF ORGANIZED SPECULATION 

cotton would use the Canadian or English exchanges, with 
a possible resort to the Continental bourses. 

The workings of the law in Germany served to inhibit 
the best features of organized speculation rather than the 
worst ones. The speculative adventurer found little in- 
convenience in telegraphing his orders abroad or resorting 
to other means of evasion; while, in the decade following 
the enactment of the law, that country appears to have 
entered into a period of speculative business and gambling 
excitement which was much more unsound than that of any 
other European country at the time. 

The good which is accomplished by organized specula- 
tion in the way of furnishing opportunities for hedging was 
interfered with; and the absence of regular quotations for 
German grain, while it by no means brought trade to a 
standstill, was nevertheless an inconvenience. The eva- 
sion of the law was so general, and the dissatisfaction with 
its workings was so widespread, that it was amended in 
1908 and its radical provisions repealed. 

Possibly the attempt of this country to prohibit what 
was called trading in gold in 1864 may be referred to as an 
example of a repressive law of this sort which was enforced; 
for it is generally conceded that, during the brief time the 
law was on the statute-books, there was little trading in 
gold. But the circumstances which surround the case are 
such that the instance proves nothing. 

During the Civil War the promises of the Government 
were circulated as money. Their value depreciated as com- 
pared with the standard, and they became the object of 
speculation. Through motives supposedly patriotic the 
speculation was conducted on the assumption that the 
value of the greenbacks was constant and that the standard 
itself was fluctuating. Hence the speculation was nomin- 
ally in gold, and when the greenbacks fell in value, it was 
said that "gold" was going up. In order to check this 
decline in the Government's promises as measured by an 



THE ALTERNATIVE 233 

assumed rise in "gold," a law was enacted prohibiting that 
form of speculation. The law was put in operation on the 
21st of June, 1864; but it caused such an "advance" in the 
value of " gold " (really a decline in the value of greenbacks) 
that the law was almost immediately repealed, the bill for 
the repeal being signed by the President on July %. 

The law was enacted after little debate in the midst of a 
war in which the life of the nation was involved. Its enact- 
ment was so sudden and it was repealed so soon afterwards 
that there was not time to organize a system of evasion; 
and in no other country was there an exchange where a 
speculator could trade on the comparative value of gold 
and of the promises to pay of the United States Govern- 
ment. 

Reforms in Method 

There will always be some form of organized speculation 
and that form must retain short selling and other essential 
features. This is seen in the fact that organized specula- 
tion has come about as a voluntary development and that 
it performs a useful function. It is childish to attempt to 
base a commercial society upon Utopian dreams. He who 
would influence human actions must take institutions that 
he finds at hand and mould them to suit his purposes. It 
would be futile for the reformer to attempt actually to 
create an institution or to annihilate one. He might as well 
attempt to create or destroy physical matter. The only 
practicable alternative for organized speculation as it exists 
is so to reform it that it will exercise that function for which 
it appears to be fitted. 

Organized speculation is perverted when an attempt is 
made to use it as a means of gambling or to further any 
form of injustice. It would not be tolerated for a moment 
if it were not for the fact that there are those who use it for 
legitimate commercial purposes; and the number and im- 
portance of those who so use it must be increased. At 



234 VALUE OF ORGANIZED SPECULATION 

present any gambler may enter the speculative exchanges 
and in the gambling spirit make trades which to him have 
all the evil effects of gambling. How to frame a law so as 
to accomplish the desired reform is one of the most delicate 
problems of statesmanship. The reforming of organized 
speculation should be the concern, not so much of legisla- 
tures as of our commercial statesmen within the exchanges, 
whose interest it is to see that the methods of these ex- 
changes are in accordance with the best business standards. 

In England, in 1877, a Royal Commission was appointed 
to inquire into the constitution and customs of the London 
Stock Exchange. The investigation that resulted was a 
thorough one; many witnesses were heard, and in 1878 the 
report was issued. Numerous recommendations were made 
in this report, and, while several of them were willingly 
adopted by the exchange, others did not result in any ac- 
tion either by the Government or the exchange. The abuses 
complained of, however, have their recent prototypes, and 
the problems can better be studied with reference to present 
American conditions. 

At a later date the Imperial Government of Germany 
appointed a commission, somewhat similar to the English 
one, to investigate the workings of the exchanges and sug- 
gest reforms. In November 1893 the labors of the commis- 
sion were concluded and its report issued. Although the 
recommendations were conservative and recognized the 
usefulness of a properly conducted exchange, the Reichstag 
did not confine itself to the measures recommended in the 
report, but enacted the radical law of 1896, previously 
mentioned. 

After the panic of 1907 in this country, Governor Hughes 
of New York appointed a committee to investigate "what 
changes, if any, are advisable in the laws of the state bear- 
ing upon speculation in securities and commodities, or re- 
lating to the protection of investors, or with regard to the 
instrumentalities and organizations used in dealing in se- 



THE ALTERNATIVE 235 

curities and commodities which are the subject of specula- 
tion." The committee, after numerous hearings, reported 
on June 7, 1909. 

This report, like those in Germany and England, is a 
conservative one, and it has resulted in several reforms in 
the method of conducting speculative business upon the 
New York Stock Exchange and elsewhere. Its recommen- 
dations being recent, and covering a wide field, will be con- 
sidered under the appropriate headings. 

Exchanges that are not Exchanges 

It is significant that when reformers seek to point out 
the evils of exchange trading, they begin with institutions 
that are not exchanges in a strict and proper sense. There 
are counterfeit markets which are given the form of ex- 
changes merely for the purpose of deceiving the public. 
The reason why those who would thus defraud give their 
schemes the form of organized speculation is because they 
know that the public (notwithstanding its frequent criti- 
cism) has much confidence in the free market furnished by 
the exchanges. 

In the battle with the bucket shops the officers of the law 
frequently found that a bucket shop, instead of masking 
as a broker's office, would pretend that it was in itself an 
exchange, and that quotations for stocks were actually 
made within its walls. The elaborateness with which the 
machinery of an exchange was counterfeited and the care 
with which the proprietors of the place acted their parts 
was most curious. 

In order that the so-called trading might be carried on 
in the name of something that was not purely the product 
of imagination, an unsuccessful mine which had been duly 
incorporated would be purchased by the proprietors of the 
bucket shop and dummy officers installed, who would be 
ready to issue the share certificates to any one who wished 
to buy and pay for the stock. But of course no one desired 



236 VALUE OF ORGANIZED SPECULATION 

to make an actual purchase of a stock which had no value. 
The reason for acquiring the corporation was to use its 
stock as a basis for fictitious quotations which were to be 
issued for gambling purposes. 

All the forms of an exchange were carefully simulated. 
Some of the employees of the proprietor were designated as 
"brokers," and went about among the so-called "traders" 
in the room soliciting orders. Every five minutes one of 
these "brokers" would receive by wire an alleged order to 
buy one of the stocks. He would bid for it the same as a 
real broker, and another of the "brokers" would pretend 
to sell it to him. The "quotation" would go upon the 
blackboard, and would be sent out to other bucket shops 
by a special ticker service and form the basis of a consid- 
erable amount of "trading." This manner of conducting 
a counterfeit exchange was called "working the tape game." 
The instance is mentioned merely to show the lengths to 
which gamblers will go in order to make a counterfeit 
appear like a real exchange. 1 

But the fraudulent use of the name exchange is not con- 
fined to giving a cloak to gambling operations. There are 
exchanges, so called, which exist for the purpose of estab- 
lishing a market price at which owners of property are 
induced to sell. For instance, the committee appointed by 
Governor Hughes, in describing the Mercantile Exchange 
in New York as it existed at the time the report was made, 
used the following language: "The published quotations 
are made by a committee, the membership of which is 
changed periodically. That committee is actually a close 
corporation of the buyers of butter and eggs, and the prices 
really represent their views as to the rates at which the 
trade generally should be ready to buy from the farmers and 
country dealers." 2 

1 Cf . Hill, Gold Bricks of Speculation, chap. vi. 

2 Report of Governor Hughes's Committee on Speculation in Securities and 
Commodities, p. 21. 



THE ALTERNATIVE 237 

Similarly, in describing the method of conducting the 
Metal Exchange, the committee has this to say: "In spite 
of the apparent activity of dealings in this organization in 
published market reports, there are no actual sales on the 
floor of the Metal Exchange, and we are assured that there 
have been none for several years. Prices are, however, 
manipulated up and down by a quotation committee of 
three, chosen annually, who represent the great metal-sell- 
ing agencies as their interest may appear, affording facili- 
ties for fixing prices on large contracts, mainly for the 
profit of a small clique, embracing, however, some of the 
largest interests in the metal trade." * 

The committee recommended that the charters of these 
exchanges be revoked, but, on account of the publicity 
afforded by the committee's report, the officers and mem- 
bers have taken measures to eliminate clique control and 
to make their exchanges true markets. 

As heretofore explained, all transactions not made during 
the regular session of the exchange in the exchange hall 
are called curb trades. The tendency is, however, when 
curb trading becomes important, for the particular commo- 
dities or securities so traded in to be admitted for trading 
in some exchange or for a new exchange to be organized 
for their benefit. The securities which have not been 
listed for trading on the New York Stock Exchange would 
naturally develop an exchange on which trading in them 
could be conducted. But the formal organization of such 
an exchange is prevented by the fact that it is principally 
through members of the New York Stock Exchange that 
trading in these outside securities is conducted, and that the 
constitution of the exchange prohibits its members from 
engaging in transactions on any other organized stock 
exchange in New York. 

These conditions have resulted in an open-air market, 
which is held on Broad Street during stock exchange hours. 

1 Report of Governor Hughes's Committee, p. 21. 



238 VALUE OF ORGANIZED SPECULATION 

Those who trade in this curb market have no formal or- 
ganization, yet all tacitly concur in certain rules and cus- 
toms, observance of which gives the appearance in some 
respects of an exchange. But the public associate any 
trading in stocks, especially that transacted by stock ex- 
change members, with the exchange itself, and, when scan- 
dal results, the whole system of organized speculation is con- 
demned. The Hughes Committee, apparently recognizing 
that there is some point in this attitude of the public, 
recommended rules for the regulation of business upon the 
curb and particularly for the admission of securities to quo- 
tation. Such rules could be readily enforced in view of the 
fact that a large proportion of the traders on the curb are 
stock exchange members who could be controlled by rules 
of the exchange. 1 

The fact that something similar to an exchange will 
arise, even in cases in which the traders are seeking to avoid 
the appearances of one, and the fact that the committee in 
seeking reforms recommends a closer approximation to an 
exchange, are excellent illustrations of the value and serv- 
ices of organized speculation. 

When circumstances are such that there is need for a 
commercial exchange, one must be created, even if the form 
adopted be of a perverted or crippled character as in the 
examples just given. The reformer should bend his ener- 
gies to change the laws and customs of the exchanges so 
that any perverted forms of exchange trading that may 
appear will be made to assume the character of true organ- 
ized speculation. 

Eliminating Uncommercial Practices 

As heretofore explained, the introduction of the spec- 
ulative element into a market and the organization of spec- 
ulation upon an exchange are the best guarantees that 
can be had at the present time against monopoly or the 

1 Report of Governor Hughes's Committee, p. 14. Cf. infra, p. 262. 



THE ALTERNATIVE 239 

domination of a clique. Yet the speculative markets are 
by no means clear of manipulation; and the freedom of or- 
ganized speculation, with its ready responsiveness to every 
gust or eddy of price movements shown in the great num- 
ber of minor fluctuations, gives facility for rapid manipu- 
lations for small turns. But the machinery of an exchange, 
with its discipline, its organization, and its publicity, 
renders it possible to reform practices which would be 
irremediable outside. And the Hughes Committee was 
able to point out legislative measures and changes in the 
rules of the exchanges which would accomplish the re- 
forms that they advocated. 

The committee favored an even greater degree of pub- 
licity than that which now exists. The books and accounts 
of the members should be subjected to periodic examina- 
tion and inspection, pursuant to rules and regulations to 
be prescribed by the exchange. 1 

The filing of frequent statements of the financial condi- 
tion of companies whose securities are listed on the ex- 
change is recommended. 2 But it was thought that the 
attempted verification of the statements of fact contained 
in the papers filed with the application for listing would 
give the securities a standing in the eyes of the public 
which would not in all cases be justified. 

It is sought to deprive the manipulator of the fruits of 
his manipulations by providing a special rule against corn- 
ers, whereby the governors of the stock exchange shall have 
power to decide when a corner exists and to fix a settlement 
price, so as to relieve innocent persons from the injury or 
ruin which compliance with the present rules would in- 
volve. 3 

Various measures are suggested looking toward the 
suppression of bucket shops. The exchange should have 
greater control of the ticker service; for it is on the con- 

1 Report of Governor Hughes's Committee, p. 8. 
2 Ibid., p. 9. 8 Ibid., p. 8. 



240 VALUE OF ORGANIZED SPECULATION 

tinuous quotations that the bucket shop principally de- 
pends. The passage of a law is recommended providing 
that, in so far as the transmission of continuous quotations 
is concerned, telegraph companies shall not be deemed 
common carriers, or be compelled against their wishes to 
transmit such quotations to any person, and that if a tele- 
graph company has reasonable ground for believing it is 
supplying quotations to a bucket shop it shall be crimin- 
ally liable equally with the keeper of the bucket shop. 
Tickers carrying quotations are to be licensed and bear a 
plate, whereon must appear the name of the corporation 
firm or individual furnishing the service or installing the 
ticker, and a license number. Telegraph companies buy- 
ing or transmitting quotations from the exchanges shall 
be required to publish semi-annually the names of all sub- 
scribers to the service furnished, and the number and loca- 
tion of the tickers, in a newspaper of general circulation 
published in the city or town in which such tickers are in- 
stalled. Measures should also be taken to control the direct 
wire service. 1 

Bucket-shopping within the exchange should also be 
severely dealt with, says the committee, and adequate 
penalties provided in case a trade be not actually executed. 2 
Specialists and others should not be allowed to buy and sell 
for their own account while acting as brokers, 3 and brokers 
should be required to furnish in all cases the names of 
brokers from whom shares were bought and to whom 
they were sold. 4 Clearing-house sheets which record the 
transactions of an exchange, such as it was the custom at 
the New York Stock Exchange to keep on file for only a 
week, should be preserved at least six years. 5 

Strict regard for the property of a client which comes 
into the hands of his broker should at all times be insisted 
upon; and brokers should not lend securities that come into 

1 Report of Governor Hughes's Committee, p. 17. 2 Ibid., p. 9. 

3 Ibid., p. 10. 4 Ibid., p. 16. B Ibid., p. 10. 



THE ALTERNATIVE 241 

their hands or re-hypothecate them except in compliance 
with the wishes of the owner or the customs of the 
exchanges. It is recommended that when a broker sells 
securities purchased for a customer who has paid for them 
in whole or in part, except upon the customer's default, or 
disposes of them for his own benefit, he shall be held guilty 
of larceny. 1 

The idea of the broker and of his clerks being placed in 
the position of trustees for the business and property of 
clients is important in the consideration of all reforms. 
Many brokers at present, in order that they may give their 
undivided attention to the interests of their clients, are 
careful to pursue the policy of not speculating at all for 
their own account. The New York Stock Exchange has a 
rule forbidding any member to carry an account for a 
clerk or employee of any other member. The committee 
recommended an extension of this rule so as to prevent 
dealing for the account of any clerk or subordinate em- 
ployee of any bank, trust company, insurance company, 
or other moneyed corporation or banker. 2 

Another important recommendation of the committee 
relates to the unit of trading. At the time the committee 
made its report, the rules of the New York Stock Exchange 
permitted bids and offers for large amounts of stock all or 
none. A trader, for instance, with the intention of mani- 
pulating the market might bid for, say 1000 shares of stock 
at, say 110 all or none. By thus bidding for a large 
amount there would be comparatively little chance of any 
one accepting the proposition; and a trader who might 
wish to sell, say 100 shares, might offer it at, say 109, with 
no takers. The requirement that the bidder in such case 
take all the shares offered at the lower price before bidding 
for the larger block at the higher price would tend to 
prevent matched orders. 3 

1 Report of Governor Hughes's Committee, p. 9. 
2 Ibid. 3 Ibid., p. 10. 



242 VALUE OF ORGANIZED SPECULATION 

Eliminating Amateurism 

It is not, however, by directly making the attempt to 
eliminate the various forms of uncommmercial practices 
upon the exchanges that the most fruitful field for the re- 
forming of organized speculation is to be found. If we wish 
to propose as an alternative a reformed system, we should 
go to the root of the evil and find on whom it is that the 
manipulator must prey. The evils of organized specula- 
tion centre about the vast mass of amateur speculators 
whose operations constitute such a large proportion of the 
trading; while the reckless manner in which these amateurs 
risk their money supplies the temptation which causes the 
market leaders to resort to manipulation and the other 
discreditable tactics. 

Organized speculation suffers from amateurism as does 
no other trade or profession. Among doctors and lawyers, 
for instance, there is an examination and a test of fitness 
before one is permitted to practice. In speculation such a 
test is, of course, impracticable, because there is as yet no 
generally recognized science of speculation, and no trea- 
tises which describe in detail the movements of the market. 
Such a science is beginning to emerge from the more com- 
prehensive science of economics, but only the beginning 
has been made. 

It was with a view to excluding the unskilled and those 
who do not possess the proper equipment of capital that 
the German law of 1896 provided for the registration of 
speculators. The law even went to the length of declar- 
ing that contracts made for future delivery upon the 
German exchanges were not enforcible at law unless both 
parties to a transaction were registered. The registry, 
however, was unpopular. Persons occupying positions of 
trust and others whom it was desirable to exclude from the 
speculative markets refused to register, but that fact did 
not deter them from the speculating. Brokers were readily 



THE ALTERNATIVE MS 

found who would execute their orders upon the strength of 
their word or the giving of security. There were many 
cases in which unregistered traders refused to pay losses, 
but the results hoped for from this provision of the law 
were not realized. Instead of discouraging illegitimate 
speculation, it only encouraged fraud, perjury, and evasion. 

Unless we can discover some method of selecting desirable 
speculators for license and excluding those who are undesir- 
able, the licensing system must prove a failure. It is also 
necessary always to keep in mind the fact that, if we go too 
far in making organized speculation difficult, the restrictive 
measures will have much the same effect as an attempt 
to abolish entirely the speculative markets. The former 
traders will seek real gambling, unorganized speculation, 
or speculative business to gratify their love of excitement. 
The elemental passions in human nature cannot be held 
back forcibly. All that can be done is to afford every fac- 
ility for the play of the better forces. 

Another method of eliminating amateurism is by dis- 
couraging the small transactions. It is, indeed, true that 
most of those who lose money upon the exchanges are poor, 
or speedily become so after they have speculated; and no 
doubt the small speculator is usually less able to give an 
intelligent reason for his operations than a large trader. 
Hence, to eliminate these small speculators would seem to 
afford a promising opportunity for reform. This policy is 
called "killing the little business" and consists of shutting 
off private wire connections in small cities and elsewhere, 
in keeping some of the smaller exchanges from getting the 
quotations of the larger ones, and in excluding privilege trad- 
ing on the theory that the smaller traders would thereby 
be deterred from speculating. 

If we consider only the present, it might appear that this 
policy would lead to a real reform. Doubtless many of the 
perverted uses of the exchanges would be done away with. 
But to one who believes that the reformer should always 



244 VALUE OF ORGANIZED SPECULATION 

keep in mind the great services in the world of commerce 
which a properly conducted system of organized specula- 
tion may perform, it would not seem wise thus roughly to 
push aside the class of smaller traders. If the people are to 
be really educated to use the exchanges for their proper 
purpose, they should learn that any speculator, even 
though he may be poor, should have a chance to grow up in 
his business by diligence and saving. We provide education 
at a small price for our professional men in the hope that 
thereby talents which might not otherwise be developed 
may be availed of. Speculators need skill more than any 
other form of equipment. If a speculator have real talent 
for his selected calling, he may be able, even though he 
begin in a small way, quickly to cut an important figure in 
the market. 

By inducing the speculator to use caution in his dealings 
and thus, if possible, preventing him from exposing his 
capital to the mercy of any gust or eddy in the speculative 
markets, we have a method of reform quite different from 
that just discussed and more promising of favorable results. 
Indeed, there is a way in which the speculator can almost 
be compelled to exercise caution in a direction in which 
caution is greatly to be desired. Margin transactions, it is 
true, are essential to exchange trading the same as in the 
case of any other business. But there is a tendency in any 
business for the equity which the business man holds over 
and above the debts that he owes, or in other words his 
margin, to become too small. This is especially noticeable 
in the case of exchange trading, as the margins in that busi- 
ness have sometimes almost reached the vanishing point 
or disappeared altogether. But by the action of the rules of 
the exchange, a trader may be required to adapt the size of 
his trades to the size of his margin and thus be compelled to 
exercise a reasonable degree of caution. The person with 
small capital should not undertake commercial enterprises 
except on a moderate scale; and speculation is the form of 



THE ALTERNATIVE 245 

business in which the danger of attempting to work on in- 
sufficient capital is greatest. 

The reform suggested is practicable because such a meas- 
ure would have the support of brokers. They desire large 
margins; for, if the client does not furnish good security in 
this way, his account is likely to become exhausted, thus 
making it necessary to close it, with possible loss to them- 
selves. They also desire it because a client who speculates 
on large margins has a greater chance of success; and, in 
case a broker had a number of such customers, he would 
not have to be continually seeking a new clientele to take 
the place of those speculators who had lost all in previous 
deals. Hence brokers would look on such a requirement as 
an excellent excuse to enable them to insist on getting that 
which they all the time desired. A properly qualified 
speculator would not be deterred from speculating by such 
a rule as that just suggested. His chances of success would 
merely be increased by his being compelled to use more 
caution. 

In pyramiding, the speculator uses his accrued profits on 
a deal as a margin for further deals, and such a pyramid, to 
carry the figure out consistently, rests upon its apex. It is 
only a question of time before the market will have a reac- 
tion, causing the broker to close out the pyramid of deals at 
a loss. A pyramid is made by either a chronic bull or a bear, 
who can only see one side of a market and who thus serves 
to negative to a great extent the services which organized 
speculation undoubtedly performs. The Hughes Commit- 
tee recommended very properly larger margins for single 
trades and for pyramids. 1 Rules of the exchanges carrying 
this recommendation into effect would constitute one of 
the most important measures that could be adopted in the 
direction of eliminating the worst features of amateurism 
from the exchanges. 

Looking at this subdivision of the subject from a slightly 

1 Report of Governor Hughes's Committee, p. 6. 



246 VALUE OF ORGANIZED SPECULATION 

different angle, it would appear that the reformer should 
not merely refrain from discouraging the trading in small 
lots, but he should positively encourage such trading. The 
stock exchange is the principal place at which the shares of 
corporations controlling the important industries of the 
country are traded in. If its rules and customs could be so 
altered as to encourage the distribution of stocks among the 
people, an important public service would be rendered. 
Surely nothing would spread prosperity more widely than 
the ownership of corporation securities by the people gen- 
erally, so that dividends and interest would go to the per- 
sons who now receive only wages. 

It is to be regretted that the rules and customs of the 
stock, exchange have not in general favored this wide dis- 
tribution of securities. If a trader wished to buy a share of 
stock on time, he has usually had offered him, not the in- 
stallment plan which encourages small payments from 
earnings with a view to ultimate proprietorship, but 
the margin plan, which, on the contrary, encourages reck- 
less borrowing under the delusive hope of quick profits 
from unsound methods of speculation and investment. The 
fact that margin trading was usually restricted to one hun- 
dred share lots has been another cause for over-trading; 
as a speculator, in order to buy the required large number 
of shares, was obliged to reduce the proportionate size of his 
margin. Thus the very evil which is the cause of great loss 
to speculators has been fostered rather than frowned upon. 

It is true that any one may buy as small an amount as 
one share of stock if he pay for it in full ; and many have 
availed themselves of the privilege. As a result there are 
many investors in the stocks of our great corporations; 
and there are not lacking financial writers who have com- 
piled statistics of the size of holdings and have discovered 
that in a nation of nearly a hundred millions there are thou- 
sands of small investors in its industries. But, in compari- 
son with the professional men and laborers in the country, 



THE ALTERNATIVE 247 

the number of stockholders is small, and enormous holdings 
still exist in the hands of a few. 

The manner in which the stock exchange could help in 
this matter would be by giving encouragement to its mem- 
bers to develop that department of their business which is 
concerned with trading in what are called "odd lots" or 
small lots of stock. In order to provide for the develop- 
ment of this kind of business, the excellent suggestion has 
been made that the brokers would naturally seek it if they 
were fortified by the rules of the exchange and by custom in 
charging what the service is worth. At present there is 
usually no difference between the rate of commission 
charged for trading in large and small lots. Hence a broker 
may buy one share of stock, get it registered in the name 
of a purchaser, and send it to him by registered mail, requir- 
ing postage, stationery, book-keeping, and other kinds of 
clerical labor besides expert advice, and yet receive for com- 
mission only twelve and a half cents. 

As heretofore explained, the immense amount of speculat- 
ive business upon an exchange pays the broker so well 
that he is enabled to work at a very small rate of commis- 
sion in all departments of his business. But when a par- 
ticular department is conducted at a loss, there is little 
incentive to develop that department. In other lines of 
trade small parcels of goods are charged for at a higher rate 
than large parcels. Why should the services of a broker be 
paid for on a different principle? If the broker felt at lib- 
erty to charge what the service is worth in odd-lot transac- 
tions, he could afford to push the sale of these small lots of 
stock by advertising and solicitation, and thus have an 
important influence in distributing the stock among people 
of moderate means. And what plan could be better 
adapted to develop the class of small investors than to 
utilize the self-interest of those specially skilled in selling 
stock? 

There are a few brokers upon the stock exchange at the 



248 VALUE OF ORGANIZED SPECULATION 

present time who advertise that they make a specialty of 
dealing in stocks in odd lots and who sell them on the in- 
stallment plan. Considered from the standpoint of the wel- 
fare of the people, the installment plan is injurious in cases 
where it encourages luxurious living in the hope of putting 
off the day of payment. But where it induces people to 
save, and especially where it diverts capital from fraudu- 
lent schemes to useful enterprises, it becomes of great 
utility. 

The tendencies of all exchange markets are against 
monopoly. But the usefulness of the stock exchange could 
be further increased if it cast its influence in the direction of 
making innocuous such monopolies as do exist by distribut- 
ing their ownership, or, in other words, by making every 
trust a people's trust. One of ,the most cruel wrongs in- 
flicted upon working-people and the poor is found in the 
fact that swindlers are allowed to foist upon them stocks 
in enterprises of the most fraudulent character, while, be- 
cause of the customs described above, they are kept out of 
touch with the experts who should be their natural advis- 
ers. Our men of light and leading in a financial way have 
it in their power, through the machinery provided by or- 
ganized speculation, gradually to turn the people from the 
dishonest schemes whose stocks could not be recognized 
upon the exchange to the ownership of shares in the corpor- 
ations which produce the staples and finer manufactures of 
the country. 

Speculation (so the writer holds) is a practical art, 
which, like other arts, is best undertaken by those who are 
adapted to it and specialize in it. But every one who seeks 
interest on savings must invest them in some way, and 
every possible method for bringing the citizenship of the 
country in touch with the best investments should be 
carefully considered by the reformer and the philan- 
thropist. 

Besides the compulsion of such rules as those considered 



THE ALTERNATIVE 249 

and the persuasion of speculators to see their own best 
interests, the systematic education of those who show apti- 
tude in the principles of speculation should constitute an 
important part of the reformative measures. It is only, 
indeed, by this means that lasting reforms can be accom- 
plished. Speculation should be cultivated as a science and 
as an art; and the methods of its study and the manner 
in which the knowledge of it is disseminated may well en- 
gage the attention of scientists and educators. 

It is the same with speculation as with any art. It cannot 
be fully developed by a system of mere rules and prohibi- 
tions. Take agriculture as an example. How can the poorly 
cultivated fields of the farmer be best brought to the re- 
quired standard? So far as laws and restrictions are con- 
cerned, there is no system which can be depended upon to 
furnish a guide to the agriculturalist in tilling the soil. 
Some favor dry farming. Others advise irrigation. There 
are those who advise a favorite specialty, such as market 
gardening or fruit-growing in all cases; while others posi- 
tively insist upon mixed husbandry as the only system. 
But these suggestions merely indicate different directions 
in which the farmer should be educated. He can effect but 
little improvement in his art from the advice and rules laid 
down for his benefit. Even a diligent attempt to follow a 
system of "don'ts" will not make an intelligent agricul- 
turalist. The best results can be attained only when the 
learner has been brought to understand the underlying 
purpose of his art and the true relation of its different parts 
and subdivisions. 

Speculation suffers in comparison with agriculture in that 
it is a newer science and the art of it is not so well devel- 
oped. But it is gratifying to note that, especially within 
the last decade, speculation has received increased atten- 
tion from students. If pursued as an art in the true scien- 
tific spirit, it affords opportunities for utilizing the most dis- 
criminating insight into economics. It is the best example 



250 VALUE OF ORGANIZED SPECULATION 

of a business in which the knowledge of underlying eco- 
nomic laws can be applied to practical affairs. The creation 
of correct public sentiment in regard to the principles in- 
volved, in short, the education of the public in the proper 
use of the exchanges, is the most important work of the 
Hughes Committee. 

Summary of the Chapter 

When the abolition of an institution is contemplated, the 
question, What is to be put in its place? should always be 
considered; or, in other words, what is the alternative? 
The critics of organized speculation habitually shirk this 
question; hence an examination of it becomes all the more 
important. 

First, the proposed laws eliminating short selling were 
considered; but it was shown that such measures would 
only result in a crippled or restricted market as an alter- 
native. 

The question of monopoly was next taken up, and the 
importance of insurance, especially of insurance against 
fluctuations in prices, dwelt upon. It was shown that to 
the small business house such insurance is almost indis- 
pensable, that the exchanges furnish the place at which the 
risks of price changes can best be borne, and that they are 
borne by speculators of gambling or risk-taking propensi- 
ties. The alternative to this system of risk-bearing is that 
of transferring the risk to the large companies or trusts 
which adopt the quite different method of guarding against 
risks by controlling the processes of production and the 
making of prices. Hence, in competition with small busi- 
ness houses that are not allowed to use the exchanges, the 
monopoly is easily able to gain the mastery and so increase 
its monopolistic power. 

The result of the freedom afforded for the interplay of 
economic forces upon an exchange is a balancing of inter- 
ests. Whether all the interests represented be good or bad, 



THE ALTERNATIVE 251 

the fact that they are given free rein is the best safeguard 
against the power of monopoly. 

The question was next considered from the standpoint of 
the individual, and it was shown that the most likely and 
acceptable alternative is real gambling. But in undertak- 
ing purely gambling hazards the gambler gratifies his risk- 
taking propensities to no useful purpose, whereas, by spec- 
ulating upon the exchanges, even considering them at their 
worst, he would be helping to bear the necessary risks of 
fluctuating values. 

Unorganized speculation was next considered as an al- 
ternative, and it was shown that the demoralizing effect 
upon individual fortunes is greater in the case of unorgan- 
ized speculation than in the organized kind. In short, the 
organization of speculation does not, all things consid- 
ered, increase its evil effects upon the individual or upon 
society. Speculative business, too, offers an unsatisfactory 
alternative, as it has many of the evils of gambling and of 
unorganized speculation. 

Considered from a practical standpoint, however, there 
is no acceptable alternative. Any law which attempts to 
abolish organized speculation or to remove essential fea- 
tures will be evaded, causing, in all probability, more in- 
jury than benefit to the commercial world. 

The only alternative which would be acceptable to 
organized speculation as it exists to-day would be a re- 
formed system which retained the essential features, but 
eliminated, so far as possible, the uncommercial practices 
which have such unwelcome prominence in large commer- 
cial exchanges. Institutions which have only the outward 
forms of exchanges should be dissolved or else made into 
true exchanges. Uncommercial practices and all manipula- 
tion should be discouraged or prohibited; and amateurism, 
the greatest cause of the evils of organized speculation, 
should be eliminated, even at the expense of much effort on 
the part of legislatures and of the exchanges themselves. 



252 VALUE OF ORGANIZED SPECULATION 

The best method to pursue in discouraging the illegiti- 
mate use of organized speculation is to encourage its legiti- 
mate use. The idea should be instilled into the minds of 
traders that the exchanges are places for the transaction 
of business, not for gambling or any form of robbery or ex- 
tortion. No attempt should be made to force the amateur 
speculator or person of risk-taking propensities to avoid all 
risks, but he should be encouraged to take those which are 
necessary and for the good of the community, and so to 
educate himself in risk-taking that he will cease to be an 
amateur. If the adventuring traders are led to substitute 
the necessary risks of commerce for their reckless gam- 
bling ventures, there will remain but little to make the 
service of the exchanges truly ideal. Most of the other 
reforms suggested are but methods of accomplishing this 
important one. In short, it is through educating the peo- 
ple in the proper use of organized speculation considered 
as a commercial instrument that reforms can best be ac- 
complished. 

In effecting these reforms the difficulties of securing legis- 
lative action could be avoided if the better element, acting 
through the regularly constituted authority of the ex- 
changes, were to pursue a consistent policy in the direction 
indicated. The measures taken should not proceed to 
startling lengths at first. It is only by gradual stages that 
an institution which has been perverted can be brought to 
its true and beneficent purpose. Speculation so organized 
that the transactions will be legitimate and perform a serv- 
ice offers the only acceptable alternative to the system of 
organized speculation as it exists to-day. 1 
1 Cf. Postscript, p. 262. 



CONCLUSION 

SUMMING UP — IMPORTANT FACTS TO BE EMPHASIZED 

THE FAULTS OF ORGANIZED SPECULATION AS IT 

EXISTS TO-DAY — ITS VALUE IN ITS IDEAL FORM 

In closing, the first important fact to be emphasized is 
that there are grave evils connected with organized specu- 
lation as it exists to-day. This is admitted on all hands, 
even among the representatives of the exchanges; but the 
problem is not to be solved by recrimination or by exag- 
gerated statements and abusive epithets. The members, 
brokers, traders, and speculators upon an exchange are not 
demons, and their sentiments are as altruistic as any. But 
when they hear their business denounced in the most un- 
sparing terms by those who know nothing of its nature and 
who take no pains to become acquainted with the facts, 
the insult is quite naturally resented. Their anger may be 
pardoned; but, as a matter of policy, it would perhaps be 
better to admit even more than they do. They protest too 
much. It should be fully and frankly conceded that the 
great mass of transactions upon the exchanges are merely 
the action of unskilled adventurers who know nothing of 
the trend of commerce and who are seeking, in the most 
childish manner, to make money without work either men- 
tal or physical. 

The case for organized speculation is so strong that it is 
not necessary to resort to any form of special pleading or 
to minimize any argument that an opponent may legiti- 
mately make. For if we look beyond the present repulsive 
aspect of the speculative exchanges and disregard the 
noisy shouting crowd of greedy money -grabbers, the whole 
process may appear in a different light. That which is re- 
pulsive is seen as merely the outward form of an import- 



254 VALUE OF ORGANIZED SPECULATION 

ant factor in commerce, as yet undeveloped; and the ex- 
change idea is seen as the crowning one in a world of pos- 
sible economic harmonies. 

The true place of business among the factors of social 
progress is hidden from us in the same sense in which it 
may be said that the underlying purpose of the phenomena 
that a biologist observes cannot be explained or exempli- 
fied. In economics, the discussion centres about the ques- 
tion, who is to act in industry, and whether enterprises 
should be undertaken by the individual, by associations of 
individuals, or by the people as a whole. The world has 
not grown old enough, nor has a sufficient fund of experi- 
ence been collected so that any observer is qualified to 
make dogmatic or sweeping assertions on this question. 
But from the mass of what has been written and said, the 
tentative conclusion appears to issue that action should 
be neither entirely social nor entirely individual in its 
character. The spirit of friendly, peaceful rivalry and of 
self-help by the individual can never be dispensed with. 
Neither is it possible for any man, either now or at any 
time, to live for himself alone. The great problem of eco- 
nomic science, which in one form or another is always the 
perplexing one, is to devise a plan whereby the world may 
get the full benefit of work from those who have the inde- 
pendence which can only come from the long exercise of 
the right of private initiative and at the same time the co- 
operation which constitutes the indispensable service of 
socializing labor. 

There are some departments of industrial activity in 
which the work is best undertaken by the community act- 
ing as a whole, and in which, indeed, it would be impossible 
for the individuals as separate units to make progress worth 
while. At the same time there are other departments in 
which it is necessary that the individuals act separately. 
As for the great mass of economic activities, they fall with- 
out either of these classes; and it requires impartial study 



CONCLUSION 255 

of the conditions prevailing in each industry at particular 
times and places before the manner of conducting them will 
be apparent. The crass blundering efforts of those who 
would constitute some authority to dictate to individuals 
in regard to all matters are only equaled by the fanatical 
utterances of those who can see no benefit in collective 
action and who would destroy the organization which is 
naturally being effected in business. 

Individuals acting for themselves with an enlightened 
self-interest competing side by side with voluntary associa- 
tions, and each of these forms of industrial activity utiliz- 
ing the factors of economic strength which naturally be- 
long to it, is the solution of the question of a great part of 
the injustice that prevails to-day. 

It would be without the scope of this essay to undertake 
to describe the manner in which these associations and in- 
dividuals would be related to one another, or to indicate 
the possible combinations that might be formed; and such 
a task would be impossible of accomplishment, as no one 
living could understand the conditions that will exist thou- 
sands of years from now. There are indications, however, 
that two important existing agencies, both of which are at 
present imperfect, will play an important part. The com- 
mercial corporations as at present managed are the object 
of execration; and much of it is just. But it should be re- 
membered that they are voluntary associations, that any 
one may enter them by purchasing their stock, and that they 
are sufficiently elastic so that persons of different degrees 
of ability with faculties fitted for performing different tasks, 
some with large and some with small amounts of capital, 
may unite, if they so wish, all these forms of production; 
and, selecting a particular field, operate for the good, not 
only of the members of the corporation, but, in a larger 
sense, for the benefit of the industrial world as a whole. 
The corporation is adapted to a field in which a rather 
compact form of organization is required, and is naturally 



256 VALUE OF ORGANIZED SPECULATION 

sought by those who are willing to bind themselves to act 
with others as a united body. It permits, however, of a di- 
versity of talents; and, even with all the present obstacles, 
it performs some tasks better than can be done by any 
other agency. 

The other institution, which is imperfect at present but 
promises so much for the future, is the commercial ex- 
change. The principle of insurance is one of the factors 
mentioned in this essay which enables the individual with 
his fortune yet to make to compete on equal terms with 
associations of great wealth and power. Life insurance 
and fire insurance are beneficent in their work; but some- 
thing that will perform the function of insurance against 
fluctuations in prices is even more important. By its influ- 
ence upon the commercial world as discussed above, and 
especially by the facilities for hedging which it furnishes, 
the exchange does give this insurance against fluctuations 
in price. 

Considered from the point of view of the interests of the 
community, it is better that the individual seek insurance 
or indemnity rather than bind himself with others to act as 
a unit. For any kind of an association, even that of a cor- 
poration in its ideal form as shown above, has some con- 
tracting influence upon individual initiative; whereas, he 
who has insured himself or hedged in some way against 
fluctuations in prices and business may act with the con- 
fidence that he has behind him a vast force of collective 
power, and at the same time he may have freedom to di- 
rect his business in his own way which is usually the best 
way. 

Such a loose and elastic form of organization as that 
suggested by the commercial exchange is best fitted to 
harmonize with activities at a future time. At present the 
people are not ready for it, which accounts for the fact that 
they misuse it, pervert it, and then bitterly criticize it. It 
exists principally as an indication of the future. All that is 



CONCLUSION 257 

needed is time for its proper development by utilizing the 
agencies that even at present have made their appearance, 
although in an imperfect form. 

The Value of Organized Speculation as shown by Present 
Tendencies 

The subject under discussion has awakened so much bit- 
ter controversy, and the lines are so sharply drawn between 
those who believe that organized speculation is a valuable 
factor in the commercial system and those who regard it 
with unmixed horror, that it is almost impossible to get 
any of the disputants to take a middle ground, or even to 
admit the force of any of the arguments that opponents 
may make. The above statement of ideals, therefore, will 
not be cordially received by those who can see no good in 
organized speculation. To such persons probably no form 
of argument will appeal which to any extent favors the ex- 
changes. But it will be interesting, and it may possibly 
remove some prejudice, if it be shown that organized spec- 
ulation is at present tending in the direction of the ideals 
suggested. 

It is not, however, in legislation, or even in action on the 
part of officers of the exchanges, that the moving force 
which shows itself in present tendencies is to be found. As 
above suggested, the only reform that goes to the root of 
the matter and that can appreciably affect the character of 
the organized markets is that of education as to their pro- 
per use. Compulsion may help to lop off some of the evil 
results of unwise practices, but it cannot take the place of 
enlightenment in developing an institution. 

First to be considered is the discipline of actual experi- 
ence and the knowledge gained through personal observa- 
tion. By hard knocks and the examples of those who have 
speculated unwisely to be seen on every hand, a fund of 
practical wisdom has been unconsciously formulated which 
already has some influence in restraining speculative ex- 



258 VALUE OF ORGANIZED SPECULATION 

cesses. Considering the long time that it has taken to learn 
the practical arts, as, for instance, agriculture, it is indeed 
remarkable that any progress should have been made in 
the newly discovered art of speculation. 

As for academic training, it must be admitted that in- 
struction in commerce is not generally provided for in the 
endowed professional and technical schools. But it may 
be mentioned, on the other hand, that in the last two de- 
cades there has been a great improvement in the writings 
upon all that relates to the speculative exchanges. This is 
seen not only in the books put out, but also in the periodi- 
cal press; and there is much more interest taken in all pub- 
lications bearing upon the subject. Thus the instruction 
is being heeded and is having a profound influence in shap- 
ing present tendencies. 

As regards the technical financial publications, they show 
continued progress, and at present are excellently adapted 
to the needs of the traders. More important, however, in 
influencing the public outside the exchanges are the pop- 
ular magazines, reviews, and periodicals which of recent 
years have established financial departments; and it is grat- 
ifying to find that, even in the case of a periodical intended 
primarily to entertain its readers, there is often seen a seri- 
ous discussion of some of the practical points of speculation 
and investment. In the daily press, also, and even in what 
is called the "yellow press," the financial departments give 
better instructions and the matter is better arranged than 
formerly. 

This continued progress being made in popular educa- 
tion in regard to finance is much of it to be attributed to 
the interest aroused in the subject by the speculative ex- 
changes themselves. The facilities afforded do not involve 
that degree of application on the part of the learner which 
is required in the professional schools by the intending 
lawyer, doctor, or other aspirant for any of the learned pro- 
fessions. It should be recollected, however, that the calling 



CONCLUSION 259 

of the speculator, even at the present time, has scarcely 
been recognized as a legitimate one; and it is not to be ex- 
pected that the development of a few decades should equal 
that of centuries. 

If it be said that there are many charlatans assuming to 
give instruction in speculative matters, the reply might be 
made that, when any trade or profession is in the formative 
period, it is not likely to be directed by conservative think- 
ers. The fact that much of the teaching is popular, and 
written in a style calculated to create an interest in finan- 
cial matters and to hold the attention of the reader, does not 
detract from the value of it; on the contrary, the instruc- 
tion is thereby made all the more effective, while disagree- 
ment in regard to any of the precepts put forward should 
not deter us from recognizing the value of the instruction 
as a whole. 

Of all the tendencies observable in the field of economics, 
the progress being made in the education of the people in 
the proper use of the speculative exchanges gives the most 
encouragement. To him who believes that commerce is 
something more than a mere temporary expedient or ne- 
cessary evil, to him who believes that the best way to 
establish prices is to give freedom to trade and an oppor- 
tunity for specialists to exert an influence, — to such a 
person the fact that the people are actually taking pains to 
learn about the only free markets that exist is cause for 
the greatest satisfaction. What surely could give us more 
hope for widely distributed prosperity among the people 
than the disposition manifested to turn aside from the cir- 
culars and advertisements of fraudulent investments that 
are such a frequent cause of poverty and ruin, and to 
substitute therefor well-considered articles in which the 
securities of legitimate productive enterprises are exempli- 
fied and compared? 

Let us consider first the commodity exchanges. The 
adventuring speculative element in them is much less im- 



260 VALUE OF ORGANIZED SPECULATION 

portantthan formerly; and the decline in what is called 
"public interest" in the market is the subject of bitter 
complaint by those who seek to profit by the recklessness 
and folly of traders. It is said by them that speculation in 
commodities is "played out," and that it does not attain 
the importance in the market that it did formerly. Indeed, 
with the decline of the plunger, it is found that the pro- 
perly equipped speculator as well as the dealer in cash grain 
or other commodities becomes more prominent. 

This effect has appeared, not merely as a result of com- 
pulsion from rules of exchanges or from laws that discour- 
age speculation, but because the people are beginning to 
see the folly of prevailing speculative methods. When the 
price of wheat, for instance, has been worked up above its 
legitimate value and the cliques are seeking to dispose of 
the property at the high price which has been artificially 
produced, they find difficulty in getting buyers, and are 
obliged to hold for a long period of time before they can 
get a chance to unload; and there are even those among 
the rank and file of speculators who actually have the tem- 
erity to sell short at such a time and patiently await the 
inevitable break which must follow. The rapidity with 
which the turns can be made upon the commodity ex- 
changes is much less than formerly. 

As for the stock exchange, the wild orgy of reckless spec- 
ulation which marked the opening decade of the present 
century will perhaps lead some persons to the belief that 
the evils which come from speculation are growing greater 
instead of less. The excitement in the stock market may 
be explained by certain special factors which appeared at 
that time and had a great unsettling influence in all com- 
mercial channels. There was at the time mentioned (what- 
ever may have been the cause) a great rise in the price of 
commodities, which resulted in feverish activity in busi- 
ness and finance. Besides, it should be called to mind that 
a transformation was, and still is, going on whereby the 



CONCLUSION 261 

organization of the industries of the country is being 
changed from the form of the small business house, copart- 
nership, or corporation to that of the large corporation or 
trust. This transformation (whether for good or ill) and 
the great attention attracted by the rapid rise in wealth 
and power of those who promoted it, coupled with the rise 
in commodity prices mentioned, could not but result in 
recklessness in the dealings in shares of the different enter- 
prises. The tendencies mentioned, however, are not likely 
to come in conjunction again; and for a decade or two we 
shall probably experience a reaction from recent prevail- 
ing conditions. 

Furthermore, in the case of securities as well as in that 
of commodities, the experience of the people and the in- 
struction they are receiving are beginning to teach them 
the folly of the unskilled adventuring methods of specu- 
lating. Thus, during the panic of 1907, it was noticed that 
there were a number of speculators and small investors 
who came into Wall Street and purchased outright many 
of the stocks which were being slaughtered, thereby adding 
greatly to the number of those whose influence and opera- 
tions stopped the decline. The people are beginning to see 
the folly of investing in the expensively advertised securi- 
ties of enterprises not organized upon business principles, 
and are turning towards the securities sold in Wall Street, 
which have been tested as to value in the school of ex- 
perience by the great financiers of the country, and are 
rapidly passing to the people to be held for speculation or 
investment. 

It would appear, therefore, from the above considera- 
tions that organized speculation, whether we consider the 
commodity exchanges or those that deal in securities, is 
showing its value in that it is beginning to be discussed by 
serious minded thinkers; and it is deriving additional im- 
portance from the fact that the people are commencing to 
seek conservative instruction in it and are actually begin- 



262 VALUE OF ORGANIZED SPECULATION 

ning to understand it, so that, to some extent at least, they 
are utilizing its best features and are dropping the features 
that militate against its usefulness. 

If the people are to have the right to buy and sell at such 
prices as they may agree upon, and if commodities are to 
be distributed by the best commercial system, then organ- 
ized speculation must occupy a place at the head of af- 
fairs. It directs commerce by means of actual transactions 
made by specialists. It tends to steady prices and prevents 
many of the eccentric price fluctuations seen outside the 
exchanges. It gives mobility where mobility is most to be 
desired. It is the enemy of monopoly in most of its forms. 
It provides facilities whereby business men of small means 
are enabled in many cases to compete on an equality with 
the large corporations or trusts; while in different ways, 
such as the opportunities afforded for hedging, it serves to 
facilitate the flow of commodities in their exchange and 
distribution. 

The value of organized speculation for the future is indi- 
cated by its suggestion of an ideal towards which the com- 
mercial world is tending. For the present its value is seen 
in the fact that it is approaching more and more nearly to 
its ideal form; and already the outlines of a commercial 
system can be discerned in which organized speculation will 
occupy the first place as the head and director of all eco- 
nomic factors. 

Postscript — Present Legislative Tendencies 

A word as to the application of these general conclusions 
to events taking place as this book goes through the press 
seems desirable. 

The Hughes Committee has been especially referred to, 
in the discussion of proposed reforms, because its inquiries 
were conducted without political or other sensationalism, 
because it gave all sides a hearing, and because its report 
was a well-considered one and its recommendations conserv- 



CONCLUSION 263 

ative. At the time of writing, and particularly at the time 
of going to press, there are different investigations attract- 
ing public attention, some of which, it is to be regretted, 
are not marked by that patient consideration demanded by 
the importance and seriousness of the subject. 

The measures at present advocated are along familiar 
lines such as abolishing or curtailing short selling or of 
restricting exchange trading by a tax, almost if not quite, 
prohibitive. It is believed that the arguments herein 
brought forward are sufficient to show the folly of doing 
anything to curtail the free action of the exchanges in the 
exercise of their natural functions. Another measure ad- 
vocated is compelling the New York Stock Exchange to 
incorporate. But, inasmuch as abuses are just as pre- 
valent upon exchanges which are already incorporated, 
it would seem that incorporation is a poor reliance for 
those who desire reforms which go to the root of the 
matter. 

Some of the proposed measures would strengthen our 
laws against fraud such as matched orders and other frauds 
that are especially prominent upon the exchanges. No one 
should oppose laws which tend to suppress fraud; but it 
should be remembered that legislation on this subject is 
always difficult of enforcement, because it is impossible to 
penetrate the inner councils of the cliques or manipulators 
who find it so easy to evade the law. 

Furthermore the fact should be kept in mind that the 
speculative exchanges are by no means the only places 
where fraud and monopoly can be found. Outside the 
exchanges cliques of business men can act much more effec- 
tively in deceiving the public and in giving a false value to 
securities or commodities. No one will pretend that cliques 
do not have their influence in organized speculation; but 
the fact is apparent that they are everywhere restricted 
by the publicity and freedom of exchange organization. 

There are occasional prosecutions under our present laws. 



264 VALUE OF ORGANIZED SPECULATION 

The Supreme Court has recently decided that running a 
corner in a commodity which is the subject of interstate 
commerce is criminal ; and a prominent operator has been 
fined for cornering the cotton market. The recent action 
of the United States Government against the Chicago 
Board of Trade under the Sherman law is a case in point. 
It is said that the best way in which to secure the repeal of 
a bad law is strictly to enforce it. For that reason the 
attempts to enforce the Sherman law are justifiable. The 
prosecutions under that law have proved that it is con- 
stitutional and that there may be decisions sustaining the 
contention of the government and that the trusts can be 
dissolved into their constituent companies. Yet, despite 
their outward compliance, the same combinations exist 
substantially as before, the same people are in charge, and 
essentially the same methods are pursued. 

In contrast to the abortive action of the Sherman law, we 
have the system of organized speculation which gives oppor- 
tunity for anyone to make his influence felt and for the 
free working of all rivalries between cliques, factions and 
individuals in the commercial world. Upon the Chicago 
Board of Trade, for instance, there is the freest market 
during the session; and it was thought by the officers and 
members of the board, or at least by a majority of them, 
that the prices at which grain is bought between the ses- 
sions should conform to the quotations made in the regular 
market. Hence bids for grain, based upon the results of 
each day's trading are sent out, which prices are uniform, 
but which prevail only until the opening of the board at 
its next daily session. The question of whether such a 
system of fixing prices is a violation of the Sherman law is 
one for the courts to decide. The humor of the situation is 
brought to mind when we realize the fact that a combina- 
tion which, at its worst, exists only part of the day is at- 
tacked, while at all times there exist outside the exchanges 
combinations which suppress competition, and some are 



CONCLUSION 265 

found even in those lines of trade in which the trusts are 
supposed to have been "broken up." 

If grain were not traded in according to the system of 
organized speculation the combination would cover the 
hours of active business of the day as well as the quieter 
portion, and, at no time, would there be a free market. If 
it were not for the publicity which goes with everything 
connected with the board a combination could readily be 
arranged which could be managed quietly and which would 
not attract sufficient attention to warrant a prosecution. 
It is the free market upon our commercial exchanges that 
destroys combinations, not the attempts to enforce the 
Sherman law which only result in giving new forms to the 
trusts without destroying their power or influence. 

The recommendations of the Pujo Committee, of Gover- 
nor Sulzer and others will doubtless result in action by some 
of our legislative bodies. Probably also the Sherman law 
will be revised or superseded by more effective legislation. 
It is not likely, however, that any radical changes will be 
made in our laws touching organized speculation, notwith- 
standing the high-sounding language of some of those who 
discuss the subject. The right of the people to form associa- 
tions for the purpose of facilitating trade is a fundamental 
one; and it is scarcely believable that in this country it will 
ever be infringed. At present the legislative proposals and 
indiscriminate criticism occupy public attention almost 
exclusively. But all this activity and interest taken in the 
speculative markets cannot but result in a juster estimate 
of the value of organized speculation. The exchanges can- 
not be destroyed. They can only be reformed by the leav- 
ening power of popular education. 



APPENDIX 



APPENDIX 



TABLE I 
YEARLY RANGE OF WHEAT PRICES AT CHICAGO 

(Report of the Chicago Board of Trade, 1910) 





Months Lowest 








Months Highest 


Year 


Prices were 
reached 


Low 


High 


Difference 


Prices were 
reached 


1865 


December 


$ .85 


$155 


$ .70 


January 


1866 


February- 


.78 


2.03 


1.25 


November 


1867 


August 


1.55 


2.85 


1.30 


May 


1868 


November 


1.04, 


\ 2.20 


1.15* 


July 


1869 


December 


.76, 


I 2.47 


1.70* 


August 


1870 


April 


.73 


; 1.31* 


.58J 


July 


1871 


August 


.99, 


1.32 


.32* 


Feb., Apl., Sept. 


1872 


November 


1.01 


1.61 


.60 


August 


1873 


September 


.89 


1.46 


.57 


July 


1874 


October 


.81J 


1.28 


.46* 


April 


1875 


February 


.83] 


; 1.30* 


.47* 


August 


1876 


July 


.83 


1.26| 


.43| 


December 


1877 


August 


1.01, 


1.76* 


.75 


May 


1878 


October 


.77 


1.14 


.37 


April 


1879 


January 


.81i 


1.33* 


•51| 


December 


1880 


August 


.86, 


1.32 

1.43* 


.45* 


January 


1881 


January 


.95j 


.47* 


October 


1882 


December 


.91 


1.40 


•48? 


April and May 


1883 


October 


.90 


1.13* 


.23* 


June 


1884 


December 


.69 


.96 


.26* 


February 


1885 


March 


•73i 


\ .91| 
.84| 


.181 


April 


1886 


October 


.69 


•15| 


January 


1887 


August 


.66 


.94J 


.281 


June 


1888 


April 


.71 


2.00 


1.281 


September 


1889 


June 


.75, 


1.08| 


.331 


February 


1890 


February 


.74 


1.08J 


.34 


August 


1891 


July 


.84j 


1.16 


.31 


April 


1892 


October 


.m 


t -911 


.22* 


February 


1893 


July 


.54 


.85 


.31 


April 


1894 


July 


.50 


•63| 


.13? 
.323 


April 


1895 


January 


.48= 


.81* 
•94| 


May 


1896 


August 


.53 


1 


November 


1897 


April 


.64 


\ 1.06 


December 


1898 


October 


.62 


1.85 


1.23 


May 


1899 


December 


.64 


.79* 


.15* 


May 


1900 


January 


.61, 


.87* 


.26 


June 


1901 


July 


.63- 


•79* 


.16| 


December 


1902 


October 


.67, 


.95 


.27* 


September 


1903 


March 


.70- 


; .93 


•22| 


September 


1904 


January 


.81 


1.22 
1.24 


•40| 


Sept., Oct., Dec. 


1905 


August 


.77; 


.464 


February 


1906 


Aug. and Sept. 


.69 


• .94| 


•25l 


May 


1907 


January 


.71 


1.22 


.51 


October 


1908 


July 


.84, 


1.11 


.26J 


May 


1909 


August 


.99 


t 1.60 


•60| 


June 


1910 


November 


.89, 


1.29* 


.40 


July 



270 



APPENDIX 



TABLE II 
YEARLY RANGE OF CORN PRICES AT CHICAGO 

(Report of the Chicago Board of Trade, 1910) 





Months Lowest 








Months Highest 


Year 


Prices were 
reached 


Low 


High 


Difference 


Prices were 
reached 


1865 


December 


$ .38 


$ .88 


8 .50 


Jan. and Feb. 


1866 


February 


•33f 


1.00 


.661 


November 


1867 


March 


.56g 


1.12 


.551 


October 


1868 


December 


.52 


1.02£ 


•50A. 


August 


1869 


January- 


.44 


•97£ 


•53£ 


August 


1870 


December 


.45 


.94£ 


.49£ 


May 


1871 


December 


•39£ 


•56§ 


.17 


March and May 


1872 


October 


.29| 


.481 


.19| 


May 


1873 


June 


.27 


.54-| 


.271 


December 


1874 


January 


.49 


.86 


.37 


September 


1875 


December 


•45£ 


•76£ 


.31 


May and July 


1876 


February 


•38| 


.49 


•10f 


May 


1877 


March 


.371 


.58 


.20| 


April 


1878 


December 


•291 


•43| 


.13| 


March 


1879 


January 


•291 


.49 


.19f 


October 


1880 


April 


.31* 

.35| 


.43| 


.m 

.40| 
.321 


November 


1881 


February 


.78| 


October 


1882 


December 


.491 


.81* 


July 


1883 


October 


.46 


.70 


.24 


January 


1884 


December 


•34£ 


.87 


•52£ 


September 


1885 


January 


•34i 
•33£ 


.49 


•14i 


April and May 


1886 


October 


.45 


.ll| 


July 


1887 


February 


.33 


•51i 


.184 


December 


1888 


December 


•33i 


.60 


.26*. 
.30! 


May 


1889 


December 


.291 


.60 


November 


1890 


February 


.271 


.54J 


.27 


November 


1891 


December 


•39£ 


.80 


.40| 


November 


1892 


January 


.371 

•34J 


1.00 


•62£ 


May 


1893 


December 


.44| 


.10! 


May 


1894 


February 


.33| 


•59| 


.251 


August 


1895 


December 


.24| 


•54J 


•291 


May 


1896 


September 


.191 


•30f 


st 


April 


1897 


Jan. and Feb. 


•21| 


•32f 


August 


1898 


January 


.26 


.38 


.12 


December 


1899 


December 


.30 


.38J 


.081 


January 


1900 


January 


•30£ 


.494 
•66| 


.19 


November 


1901 


January 


.36 


.30| 


December 


1902 


December 


.43| 


.88 


.441 


July 


1903 


December 


.41 


.53 


.12 


July and August 


1904 


January 


.422 


•58£ 


.15| 


November 


1905 


Jan. and Dec. 


.42 


.64§ 


.22£ 


May 


1906 


Feb. and March 


.39 


•54f 


.15! 
.261 


June 


1907 


January 


•39| 


.66i 


October 


1908 


February 


•56£ 


.82 


•25| 


May and Sept. 


1909 


January 


.58* 


.77 


.18! 


June 


1910 


December 


.45$ 


.68 


.22* 


January 



APPENDIX 



271 



r3F- 



TABLE III 



YEARLY RANGE OF COTTON PRICES AT NEW 
YORK (CENTS PER POUND) 



(Shepperson, Cotton Facts, 1910) 



Tear 


Highest 


Lowest 


Difference 


Year 


Highest 


Lowest 


Difference 


1830 


13 


8 


5 


1870 


25.75 


15 


10.75 


1831 


11 


7 


4 


1871 


21.25 


14.75 


6.50 


1832 


12 


7 


5 


1872 


27.38 


18.63 


8.75 


1833 


17 


9 


8 


1873 


21.38 


13.63 


7.75 


1834 


16 


10 


6 


1874 


18.88 


14.75 


4.13 


1835 


20 


15 


5 


1875 


17.13 


13.06 


4.07 


1836 


20 


12 


8 


1876 


13.38 


10.88 


2.50 


1837 


17 


7 


10 


1877 


13.31 


10.81 


2.50 


1838 


12 


9 


3 


1878 


12.19 


8.81 


3.38 


1839 


16 


11 


5 


1879 


13.75 


9.25 


4.50 


1840 


10 


8 


2 


1880 


13.25 


10.94 


2.31 


1841 


11 


9 


2 


1881 


13 


10.44 


2.56 


1842 


9 


7 


2 


1882 


13.06 


10.25 


2.81 


1843 


8 


5 


3 


1883 


11.13 


10.00 


1.13 


1844 


9 


5 


4 


1884 


11.94 


9.75 


2.19 


1845 


8.38 


5 


3.38 


1885 


11.50 


9.19 


2.31 


1846 


10 


6 


4 


1886 


9.56 


8.81 


.75 


1847 


12 


7 


5 


1887 


11.44 


9.44 


2.00 


1848 


8 


5 


3 


1888 


11.38 


9.63 


1.75 


1849 


11 


6 


5 


1889 


11.50 


9.75 


1.75 


1850 


14 


11 


3 


1890 


12.75 


9.19 


3.56 


1851 


14 


8 


6 


1891 


9.50 


7.75 


1.75 


1852 


10 


8 


2 


1892 


10.00 


6.69 


3.31 


1853 


11 


10 


1 


1893 


9.94 


7.25 


2.69 


1854 


10 


8 


2 


1894 


8.31 


5.56 


2.75 


1855 


12 


8 


4 


1895 


9.38 


5.56 


3.82 


1856 


13 


9 


4 


1896 


8.88 


7.06 


1.82 


1857 


15.88 


9 


6.88 


1897 


8.25 


5.81 


2.44 


1858 


13.50 


8.88 


4.62 


1898 


6.56 


5.31 


1.25 


1859 


12.75 


10.63 


2.12 


1899 


7.81 


5.88 


1.93 


1860 


11.63 


10 


1.63 


1900 


1100 


7.56 


3.44 


1861 


38 


11.50 


2.65 


1901 


12.00 


7.81 


4.19 


1862 


69.50 


20 


49.50 


1902 


9.88 


8.38 


1.50 


1863 


93 


51 


42.00 


1903 


13.70 


8.85 


4.85 


1864 


1.90 


72 


118.00 


1904 


16.65 


6.85 


9.80 


1865 


1.20 


35 


85.00 


1905 


12.60 


7.00 


5.60 


1866 


52 


32 


20.00 


1906 


12.25 


9.60 


2.65 


1867 


36 


15.50 


20.50 


1907 


13.55 


10.60 


2.90 


1868 


33 


16 


17.00 


1908 


12.25 


9.09 


3.16 


1869 


35 


25 


10.00 


1909 


16.10 


9.25 


6.85 



m% 



APPENDIX 



TABLE IV 

MEAN MONTHLY PRICE CONTRACT WHEAT (CASH) 
AT CHICAGO, 1901-1910 (CENTS PER BUSHEL) 

(Based upon Reports of the Chicago Board of Trade and Bartels & Co., Book of 
Statistical Information) 



Months 


1901 


1902 


1903 


1904 


1905 


1906 


1907 


1908 


1909 


1910 


Average 


Jan. 


73.9 


77.3 


75.0 


87.4 


118.2 


85.6 


73.3 


96.8 


105.7 


118.9 


91.2 


Feb. 


73.4 


74.7 


77.1 


98.0 


118.8 


83.1 


79.9 


94.6 


115.8 


119.4 


93.5 


March 


74.8 


72.9 


73.1 


95.6 


114.9 


80.0 


79.5 


96.6 


121.9 


119.0 


92.8 


April 


72.2 


73.4 


75.3 


93.9 


103.1 


84.5 


80.5 


94.4 


131.9 


113.8 


92.3 


May 


72.6 


74.3 


77.7 


96.9 


100.4 


87.5 


92.5 


104.8 


140.3 


108.6 


95.6 


June 


71.4 


73.5 


80.1 


99.0 


107.0 


85.4 


96.0 


94.6 


144.5 


105.9 


95.7 


July 


67.4 


75.3 


79.5 


103.3 


103.3 


78.8 


97.8 


88.3 


123.1 


114.0 


93.1 


Aug. 


71.8 


72.1 


83.8 


107.0 


96.4 


73.5 


93.4 


92.8 


117.6 


112.3 


92.1 


Sept. 


69.6 


82.5 


83.8 


113.8 


86.9 


74.1 


101.8 


100.7 


107.8 


106.3 


92.7 


Oct. 


69.1 


71.5 


82.4 


115.9 


87.5 


'72.4 


106.8 


102.6 


112.3 


102.8 


92.3 


Nov. 


71.9 


73.6 


81.0 


114.9 


87.6 


72.9 


92.8 


104.6 


112.1 


99.3 


91.1 


Dec. 


76.3 


74.8 


82.4 


116.6 


86.3 


73.8 


102.2 


103.1 


117.1 


100.0 


93.3 



TABLE V 

MEAN MONTHLY PRICE NO. 2 CORN (CASH) AT 
CHICAGO, 1901-1910 (CENTS PER BUSHEL) 



(Based upon Reports of the Chicago Board of Trade and Bartels & Co., Book of 
Statistical Information) 



Months 


1901 


1902 


1903 


1904 


1905 


1906 


1907 


1908 


1909 


1910 


Average 


Jan. 


36.9 


60.5 


45.9 


45.1 


42.6 


42.0 


41.6 


58.5 


59.5 


65.3 


49.8 


Feb. 


38.6 


58.9 


43.8 


50.3 


44.1 


40.6 


43.6 


58.0 


63.3 


64.8 


50.6 


March 


41.5 


58.6 


43.5 


52.8 


47.0 


41.5 


44.0 


62.3 


65.8 


62.5 


51.9 


April 


44.5 


60.6 


43.5 


51.7 


47.8 


45.8 


47.5 


66.5 


69.5 


58.8 


53.6 


May 


50.6 


61.9 


45.0 


48.6 


56.3 


48.8 


52.8 


74.9 


74.1 


59.5 


57.2 


June 


42.7 


66.3 


49.6 


48.8 


54.3 


52.4 


53.1 


70.8 


74.3 


59.0 


57.1 


July 


50.9 


72.0 


51.0 


48.6 


56.4 


51.4 


53.6 


74.3 


71.1 


63.0 


59.2 


Aug. 


56.6 


57.0 


51.8 


53.5 


55.0 


49.8 


57.8 


78.8 


68.3 


63.1 


59.2 


Sept. 


56.9 


59.8 


49.0 


52.9 


52.9 


48.5 


62.1 


80.0 


66.4 


55.4 


58.4 


Oct. 


56.3 


58.3 


44.8 


53.6 


52.3 


46.0 


61.1 


72.5 


60.5 


50.0 


55.5 


Nov. 


60.5 


55.0 


43.1 


54.1 


48.5 


45.6 


58.0 


64.3 


62.9 


49.8 


54.2 


Dec. 


65.0 


50.5 


42.4 


46.3 


46.1 


43.0 


59.5 


59.5 


64.3 


47.8 


52.4 



APPENDIX 
TABLE VI 



273 



AVERAGE MONTHLY PRICE MIDDLING UPLAND 
COTTON AT NEW YORK 1900-1909 (CENTS PER 
POUND) 

(Based upon Shepperson, Cotton Facts) 



Months 


1900 


1901 


1902 


1903 


1904 


1905 


1906 


1907 


1908 


1909 


Average 


Jan. 


7.77 


10.06 


8.30 


8.95 


14.13 


7.21 


11.95 


10.84 


11.80 


9.64 


10.07 


Feb. 


8.63 


9.64 


8.62 


9.49 


14.94 


7.75 


11.16 


11.03 


11.55 


9.86 


10.27 


March 


9.66 


8.69 


9.02 


10.08 


15.44 


8.01 


11.30 


11.20 


11.01 


9.76 


10.42 


April 


9.81 


8.34 


9.39 


10.45 


14.40 


7.90 


11.74 


11.13 


10.19 


10.50 


10.39 


May 


9.55 


8.17 


9.52 


11.36 


13.41 


8.37 


11.81 


12.17 


10.89 


11.29 


10.65 


June 


9.22 


8.53 


9.33 


12.44 


11.54 


9.06 


11.03 


13.10 


11.70 


11.56 


10.75 


July 


10.08 


8.50 


9.27 


12.81 


10.85 


11.11 


10.90 


13.13 


11.10 


12.64 


11.04 


Aug. 


9.84 


8.21 


8.96 


12.75 


10.93 


10.94 


10.30 


13.36 


10.27 


12.78 


10.83 


Sept. 


10.53 


8.39 


8.94 


11.84 


11.09 


10.84 


9.76 


12.54 


9.38 


13.04 


10.64 


Oct. 


10.09 


8.44 


8.80 


9.85 


10.36 


10.35 


10.99 


11.54 


9.20 


13.90 


10.35 


Nov. 


9.90 


7.95 


8.49 


11.18 


9.91 


11.49 


10.80 


11.08 


9.40 


14.79 


10.50 


Dec. 


10.19 


8.48 


8.65 


13.01 


7.69 


12.15 


10.65 


11.96 


9.23 


15.30 


10.73 



TABLE VII 

MEAN MONTHLY PRICE CONTRACT WHEAT (CASH) 
AT CHICAGO BY YEARS ENDING JUNE 30 (CENTS 
PER BUSHEL) 



(Based upon Reports of the Chicago Board of Trade and 
Statistical Information) 



& Co., Book of 



Tears 


























Yearly 


ending 


July 


Aug. 


Sept. 


Oct. 


Nov. 


Dec. 


Jan. 


Feb. 


Mch. 


Apr. 


May 


June 


Aver- 


June 30 


























age 


1893 


78.0 


77.1 


73.1 


72.0 


71.4 


71.0 


75.1 


73.9 


76.0 


79.3 


72.3 


65.1 


73.7 


1894 


60.3 


59.6 


66.2 


63.4 


60.9 


61.8 


61.4 


57.5 


57.6 


60.1 


56.1 


57.0 


60.1 


1895 


54.4 


53.9 


52.7 


51.4 


53.7 


54.9 


51.9 


50.8 


53.6 


58.7 


71.1 


75.0 


56.8 


1896 


66.3 


63.9 


58.7 


59.6 


57.0 


56.8 


62.3 


66.6 


65.4 


66.1 


62.4 


60.3 


62.1 


1897 


58.3 


58.1 


62.5 


73.4 


82.7 


83.9 


77.0 


74.5 


73.5 


72.0 


72.4 


70.0 


71.5 


1898 


73.5 


88.0 


92.5 


90.0 


92.3 


96.0 


99.6 


101.5 


103.4 


112.2 


151.0 


97.5 


99.8 


1899 


76.9 


70.3 


65.4 


66.1 


67.0 


66.4 


71.3 


72.1 


70.3 


73.3 


73.9 


75.3 


70.7 


1900 


72.0 


71.8 


72.3 


71.6 


68.3 


66.8 


64.3 


65.7 


65.5 


66.3 


65.6 


76.7 


68.9 


1901 


77.8 


74.0 


75.9 


74.4 


71.9 


71.9J 73.9 


73.4 


74.8 


72.2 


72.6 


71.4 


73.7 


1902 


67.4 


71.8 


69.6 


69.1 


71.9 


76.3 


77.3 


74.7 


72.9 


73.4 


74.3 


73.5 


72.7 


1903 


75.3 


72.1 


82.5 


71.5 


73.6 


74.8 


75.0 


77.1 


73.1 


75.3 


77.7 


80.1 


75.7 


1904 


79.8 


83.8 


83.8 


82.3 


81.0 


82.4 


87.4 


98.0 


95.6 


93.9 


96.9 


99.0 


88.6 


1905 


103.2 


107.0 


113.8 


115.9 


114.9 


113.9 


118.3 


118.8 


114.9 


103.1 


100.4 


107.0 


111.0 


1906 


103.2 


96.4 


86.9 


87.5 


87.6 


86.3 


85.6 


83.1 


80.0 


84.5 


87.5 


85.4 


87.8 


1907 


78.8 


73.5 


74.1 


72.4 


72.9 


73.8 


73.3 


79.9 


79.5 


80.5 


92.5 


96.0 


78.9 


1908 


97.8 


93.4 


101.8 


106.8 


92.8 


102.2 


96.8 


94.6 


100.0 


98.0 


104.8 


100.6 


99.1 


1909 


101.8 


106.9 


102.2 


102.6 


104.6 


107.7 


105.7 


115.8 


121.9 


131.9 


140.3 


144.5 


115.5 


1910 


123.1 


117.6 


107.8 


112.3 


112.1 


117.1 


118.9 


119.4 


119.0 


113.8 


108.6 


105.9 


114.6 



274. APPENDIX 

TABLE VIII 

VISIBLE SUPPLY OF WHEAT IN MILLIONS OF 
BUSHELS BY YEARS ENDING JUNE 30 

(Based upon Reports of the Chicago Board of Trade and Bartels & Co., Book of 
Statistical Information) 



Years 


























Aver- 


ending 


July 


Aug. 


Sept. 


Oct. 


Nov. 


Dec. 


Jan. 


Feb. 


Men. 


Apr. 


May 


June 


June 30 


























age 


1893 


24.3 


23.9 


36.3 


47.9 


61.7 


72.6 


81.8 


81.5 


79.1 


77.7 


75.0 


71.1 


61.1 


1894 


62.3 


59.3 


56.9 


60.5 


69.3 


78.1 


79.9 


79.9 


75.6 


71.5 


66.6 


59.4 


68.3 


1895 


54.7 


57.1 


66.9 


71.4 


80.0 


85.2 


87.9 


83.4 


78.8 


74.3 


62.2 


52.2 


71.2 


1896 


44.6 


38.5 


35.4 


40.8 


52.9 


63.9 


69.8 


66.7 


64.1 


60.3 


55.5 


50.3 


53.6 


1897 


47.2 


46.8 


45.6 


50.1 


58.7 


56.3 


54.7 


49.6 


43.8 


38.6 


34.4 


26.9 


46.1 


1898 


17.6 


17,8 


14.8 


21.1 


26.9 


34.8 


38.8 


36.6 


34.1 


30.2 


23.3 


23.7 


26.6 


1899 


14.7 


9.1 


7.1 


11.3 


15.5 


24.1 


26.9 


28.6 


29.9 


29.9 


28.1 


26.2 


20.9 


1900 


33.6 


36.0 


34.8 


42.1 


49.6 


55.8 


58.3 


54.4 


54.1 


54.2 


52.5 


44.7 


47.5 


1901 


46.4 


47.6 


50.3 


55.4 


60.0 


62.2 


61.2 


59.8 


57.2 


54.7 


46.7 


36.9 


53.2 


1902 


30.8 


30.4 


27.8 


35.3 


41.2 


52.4 


58.9 


57.9 


54.1 


49.6 


38.3 


28.6 


42.1 


1903 


19.8 


21.9 


20.9 


25.6 


32.2 


45.1 


49.7 


48.4 


47.8 


41.9 


33.5 


24.5 


34.3 


1904 


15.9 


13.4 


13.2 


19.5 


22.2 


30.1 


38.2 


39.8 


35.6 


31.7 


30.4 


21.6 


25.9 


1905 


14.1 


13.1 


12.8 


17.6 


26.5 


36 J .9 


40.6 


39.4 


36.5 


32.3 


28.5 


20.0 


26.5 


1906 


14.3 


13.4 


12.1 


17.9 


28.3 


36.9 


45.3 


48.5 


47.3 


46.5 


38.4 


30.8 


31.6 


1907 


25.9 


29.9 


30.1 


33.4 


37.9 


41.6 


45.8 


44.9 


44.9 


47.2 


51.9 


49.7 


40.3 


1908 


46.5 


48.3 


49.5 


43.8 


43.7 


43.5 


48.5 


46.7 


42.9 


38.1 


30.3 


22.8 


42.1 


1909 


15.4 


16.2 


16.3 


29.9 


48.1 


48.9 


51.8 


44.9 


38.2 


36.1 


29.6 


19.8 


32.9 


1910 


9.8 


7.6 


9.2 


19.4 


27.0 


31.1 


27.7 


26.5 


25.8 


29.0 


26.2 


20.1 


21.6 



TABLE IX 

MEAN MONTHLY PRICE NO. 2 CORN (CASH) BY YEARS 
ENDING JUNE 30 (CENTS PER BUSHEL) 



(Based upon Reports of the Chicago Board of Trade and Bartels & Co 


, Book of 




Statistical Information) 


Tears 


























Yearly 


ending 


July 


Aug. 


Sept. 


Oct. 


Nov. 


Dec. 


Jan. 


Feb. 


Mch. 


Apr. 


May 


June 


Aver- 


June 30 


























age 


1893 


49.6 


51.8 


46.2 


42.4 


41.8 


41.4 


42.6 


42.0 


40.8 


40.8 


42.0 


39.6 


43.4 


1894 


38.7 


38.2 


39.9 


39.0 


37.2 


35.4 


34.9 


34.7 


35.8 


37.9 


37.6 


39.9 


37.4 


1895 


43.5 


53.1 


53.0 


50.9 


50.0 


46.1 


43 


42.1 


44.4 


46.9 


51.6 


50.0 


47.9 


1896 


44.6 


39.7 


33.4 


30.0 


27.9 


25.8 


26.9 


28.4 


28.6 


29.6 


28.5 


27.4 


30.9 


1897 


25.9 


22.8 


20.9 


23.1 


24.1 


23.1 


22.6 


22.5 


23.8 


24.2 


24.3 


24.4 


23.5 


1898 


26.4 


29.4 


29.6 


26.5 


26.7 


26.3 


27.1 


28.9 


28.9 


32.1 


34.7 


32.4 


29.2 . 


1899 


33.6 


31.8 


30.3 


30.8 


33.1 


35.6 


36.7 


35.3 


34.6 


34.8 


33.4 


34.4 


33.7 


1900 


32.9 


31.8 


33.1 


32.0 


32.0 


30.8 


31.1 


32.9 


35.8 


39.6 


38.3 


40.4 


34.2 


1901 


41.6 


39.3 


41.1 


39.1 


42.3 


37.9 


36.9 


38.6 


41.5 


44.5 


50.5 


42.7 


41.3 


1902 


50.9 


56.6 


56.9 


56.3 


60.5 


65.0 


60.5 


58.9 


58.6 


60.6 


61.9 


66.3 


59.5 


1903 


72.0 


57.0 


59.7 


58.3 


55.0 


50.5 


45.9 


43.8 


43.5 


43.5 


45.0 


49.6 


51.9 


1904 


51.0 


51.7 


49.0 


44.8 


43.1 


42.4 


45.1 


50.3 


52.8 


51.7 


48.6 


48.8 


48.2 


1905 


48.6 


53.5 


52.9 


53.6 


54.1 


46.3 


42.6 


44.1 


47.0 


47.8 


56.3 


54.3 


50.0 


1906 


56.4 


55.0 


52.8 


52.3 


48.5 


46.1 


42.0 


40.6 


41.5 


45.8 


48.8 


52.4 


48.5 


1907 


51.4 


49.8 


48.5 


46.0 


45.6 


43.0 


41.6 


43.6 


44.0 


47.5 


52.8 


53.1 


47.2 


1908 


53.6 


57.8 


62.1 


61.1 


58.0 


59.5 


58.5 


58.0 


62.3 


66.5 


74.9 


70.8 


61.9 


1909 


74.3 


78.8 


80.0 


72.5 


64.3 


59.5 


59.5 


63.3 


65.8 


69.5 


74.1 


74.3 


69.4 


1910 


71.1 


68.3 


66.4 


60.5 


62.9 


64.3 


65.3 


64.8 


62.5 


58.8 


59.5 


59.0 


63.6 



APPENDIX 
TABLE X 



275 



VISIBLE SUPPLY OF CORN IN MILLIONS OF BUSHELS 
BY YEARS ENDING JUNE 30 

(Based upon Reports of the Chicago Board of Trade and Bartels & Co., Book of 
Statistical Information) 



Tears 
ending 
June 30 


July 


Aug. 


Sept. 


Oct. 


Nov. 


Dec. 


Jan. 


Feb. 


Mch. 


Apr. 


May 


June 


Aver- 
age 


1893 


7.8 


7.0 


8.5 


10.9 


13.3 


10.7 


11.8 


12.5 


15.6 


15.3 


11.5 


8.2 


11.1 


1894 


8.1 


8.0 


5.5 


8.1 


9.2 


7.1 


9.5 


15.4 


19.1 


18.5 


13.1 


7.5 


10.8 


1895 


6.4 


3.9 


3.1 


4.3 


2.7 


4.9 


10.7 


12.7 


13.7 


13.4 


9.4 


10.8 


8.0 


1896 


9.1 


4.7 


5.4 


5.5 


4.9 


5.5 


5.8 


11.9 


13.0 


16.9 


11.3 


8.9 


8.6 


1897 


9.1 


10.8 


13.9 


13.9 


19.3 


17.4 


19.9 


21.9 


26.4 


25.3 


16.9 


12.5 


17.2 


1898 


15.9 


15.7 


31.2 37.0 


45.9 


40.9 


38.4 


40.6 


40.9 


42.6 


27.0 


20.1 


33.1 


1899 


22.6 


17.6 


16.9 


21.4 


24.8 


20.4 


19.1 


27.1 


31.8 


32.7 


25.8 


13.3 


22.8 


1900 


13.9 


11.6 


6.7 


12.5 


13.7 


11.7 


11.6 


14.6 


19.7 


21.6 


21.9 


12.4 


14.3 


1901 


11.0 


12.3 


5.3 


7.5 


7.9 


9.4 


10.4 


14.8 


19.8 


22.3 


18.7 


16.4 


12.9 


1902 


15.2 


12.6 


12.7 


13.5 


12.9 


11.2 


11.7 


11.6 


10.3 


8.8 


6.2 


4.2 


10.9 


1903 


5.7 


7.3 


3.1 


3.1 


2.6 


2.9 


6.6 


8.3 


10.2 


9.8 


6.5 


4.9 


5.9 


1904 


7.2 


6.9 


5.8 


9.1 


7.3 


5.9 


5.8 


7.2 


8.8 


9.7 


7.8 


3.7 


7.1 


1905 


6.3 


5.8 


3.9 


5.9 


3.0 


3.2 


9.6 


11.7 


8.5 


8.8 


9.9 


4.6 


6.8 


1906 


3.6 


5.3 


4.6 


5.8 


3.5 


6.4 


12.8 


14.9 


16.2 


11.4 


3.9 


3.4 


7.7 


1907 


6.1 


4.3 


2.3 


4.2 


3.8 


2.9 


5.8 


7.3 


11.1 


11.9 


8.1 


5.6 


6.1 


1908 


8.7 


7.6 


3.9 


3.8 


3.4 


2.5 


4.5 


6.5 


8.8 


5.9 


5.0 


4.8 


5.5 


1909 


3.3 


2.1 


1.9 


3.5 


1.2 


2.7 


7.2 


6.5 


6.3 


6.9 


3.6 


2.8 


4.0 


1910 


3.3 


2.7 


1.9 


3.4 


2.7 


4.6 


8.5 


9.8 


14.4 


13.8 


10.6 


5.5 


6.8 



TABLE XI 

AVERAGE MONTHLY PRICE MIDDLING UPLANDS COT- 
TON IN NEW YORK BY YEARS ENDING AUGUST 31 
(CENTS PER POUND) 

(Based upon Shepperson, Cotton Facts) 



Tears 
ending 
Aug. 31 


Sept. 


Oct. 


Nov. 


Dec. 


Jan. 


Feb. 


Mch. 


Apr. 


May 


June 


July 


Aug. 


Aver- 
age 


1899 


5.61 


5.42 


5.40 


5.78 


6.11 


6.50 


6.44 


6.19 


6.23 


6.19 


6.17 


6.22 


6.02 


1900 


6.57 


7.31 


7.62 


7.66 


7.77 


8.63 


9.66 


9.81 


9.55 


9.22 


10.08 


9.84 


8.65 


1901 


10.53 


10.09 


9.90 


10.19 


10.06 


9.64 


8.69 


8.34 


8.17 


8.53 


8.50 


8.21 


9.24 


1902 


8.39 


8.44 


7.95 


8.48 


8.30 


8.62 


9.02 


9.39 


9.52 


9.33 


9.27 


8.96 


8.81 


1903 


8.94 


8.80 


8.49 


8.65 


8.95 


9.49 


10.08 


10.45 


11.36 


12.44 


12.81 


12.75 


10.27 


1904 


11.84 


9.85 


11.18 


13.01 


14.13 


14.94 


15.44 


14.40 


13.41 


11.54 


10.85 


10.93 


12.63 


1905 


11.09 


10.36 


9.91 


7.69 


7.21 


7.75 


8.01 


7.90 


8.37 


9.06 


11.11 


10.94 


9.12 


1906 


10.84 


10.35 


11.49 


12.15 


11.95 


11.16 


11.30 


11.74 


11.81 


11.03 


10.90 


10.30 


11.25 


1907 


9.76 


10.99 


10.80 


10.65 


10.84 


11.03 


11.20 


11.13 


12.17 


13.10 


13.13 


13.36 11.51 


1908 


12.54 


11.54 


11.08 


11.96 


11.80 


11.55 


11.01 


10.19 


10.89 


11.70 


11.10 


10.27J 11.30 


1909 


9.38 


9.20 


9.40 


9.23 


9.64 


9.86 


9.76 


10.50 


11.29 


11.56 


12.64 


12.78 10.44 


1910 


13.04 


13.90 


14.79 


15.30 


14.85 


14.80 


15.04 


15.06 


15.32 


15.19 


15.59 


16.66 14.96 



276 



APPENDIX 
TABLE XII 



VISIBLE SUPPLY OF AMERICAN COTTON IN MILLIONS 
OF BALES YEAR ENDING AUGUST 31 

(Based upon Shepperson, Cotton Facts) 



Years, 
ending 


Sept. 


Oct. 


Nov. 


Dec. 


Jan. 


Feb. 


Mch. 


Apr. 


May 


June 


July 


Aug. 


Aver- 
age 


Aug. 31 


























1899 


1.37 


2.35 


3.60 


4.40 


4.82 


4.55 


4.18 


3.89 


3.54 


3.09 


2.55 


2.11 


3.37 


1900 


1.97 


2.71 


3.18 


3.41 


3.42 


3.29 


3.07 


2.42 


1.99 


1.55 


.97 


.72 


2.39 


1901 


.53 


1.53 


2.55 


3.11 


3.22 


3.08 


2.97 


2.78 


2.31 


1.90 


1.53 


1.09 


2.22 


1902 


.84 


1.37 


2.68 


3.20 


3.60 


3.41 


3.14 


2.77 


2.24 


1.79 


1.41 


.92 


2.28 


1903 


.89 


1.63 


2.52 


2.94 


3.17 


2.99 


2.59 


2.25 


1.72 


1.35 


1.04 


.67 


1.98 


1904 


.39 


1.09 


2.36 


3.00 


3.14 


2.80 


2.29 


1.97 


1.60 


1.28 


.98 


.56 


1.79 


1905 


.53 


1.60 


2.86 


3.63 


3.74 


3.37 


2.99 


2.93 


2.69 


2.38 


1.99 


1.66 


2.53 


1906 


1.63 


2.28 


3.20 


3.83 


3.99 


3.73 


3.40 


2.90 


2.43 


2.07 


1.53 


1.03 


2.67 


1907 


.82 


1.36 


2.79 


3.64 


4.18 


4.23 


4.04 


3.79 


3.09 


2.57 


2.06 


1.54 


2.84 


1908 


1.24 


1.58 


2.53 


3.12 


3.75 


3.73 


3.67 


2.97 


2.48 


1.96 


1.56 


1.08 


2.47 


1909 


.95 


1.56 


3.06 


3.92 


4.48 


4.48 


4.16 


3.70 


3.29 


2.84 


2.34 


1.69 


3.04 


1910 


1.40 


2.03 


3.47 


3.74 


3.76 


3.45 


3.08 


2.79 


2.22 


1.78 


1.34 


.92 


2.49 



TABLE XIII 

RELATIVE PRICES OF STOCKS COMPARED WITH REL- 
ATIVE RAILWAY DIVIDENDS AND NET INCOME, 
BY YEARS ENDING JUNE 30, 1891-1909, ARITHMETIC 
MEANS 

(Based upon figures of Wesley C. Mitchell, see p. 136 supra) 



Tears ending 


Relative Prices of 


Relative Railway 


Relative Net Income of 


June 30 


Stocks 


Dividends per Mile 


Railways per Mile 


1890 




104 


110 


1891 


112 


108 


115 


1892 


/ 121 


113 


121 


1893 


113 


109 


111 


1894 


83 


105 


54 


1895 


80 


87 


54 


1896 


85 


87 


83 


1897 


75 


86 


75 


1898 


92 


94 


129 


1899 


111 


107 


148 


1900 


132 


131 


200 


1901 


166 


145 


209 


1902 


233 


167 


237 


1903 


242 


173 


244 


1904 


174 


189 


222 


1905 


225 


198 


255 


1906 


262 


221 


293 


1907 


247 


245 


335 


1908 


182 


310 


293 


1909 


244 


248 


287 



INDEX 



INDEX 



Account system, more highly devel- 
oped in Europe than in America, 
32, 44; in organized speculation, 
43. 

Adams, Charles Francis, Jr., cited, 
201. 

Adventurers, numerous on the ex- 
changes, 253. 

Agriculture, testimony before Com- 
mittee, House of Representatives, 
1st Sess., 52d Congress, cited, 124, 
175. 

Amateur speculators, are called 
lambs, 47; their helplessness, 50- 
51; derange the market, 140; fur- 
nish a broad market, 147; their 
pathological mental condition 
should be studied, 147; of special 
importance in America, 147; their 
recklessness should be bluntly 
stated, 148; their absurdities 
described, 150; pay most of the 
cost of risk-taking on the ex- 
changes, 210; their origin, 223; 
test of fitness impracticable, 242; 
German attempt to eliminate 
them, 242-43; a practical measure 
to restrict their activity, 244-45; 
should not be forced to avoid all 
risks, 252. 

Annals American Academy Political 
and Social Science, cited, 19. 

Anti-optionists, their mistake, 70; 
attribute declines to speculation, 
97; their inconsistency, 97; their 
congressional campaigns, 99; can 
see bearish but not bullish inter- 
ests, 108, 111; usually avoid sta- 
tistics, 120; their changes of opin- 
ion, 122; fail to understand hedg- 
ing, 125. 

Anti-option laws, advocated by 



monopolists, 217; evasion of, 230- 
31. 

Arbitragers, their function ex- 
plained, 27; compared with specu- 
lators, 28. 

Arbitration, on the exchanges, 197. 

Auction, similarity to exchange 
trading, 19. 

Bank of England, used by stock- 
brokers in early times, 10. 

Bank stocks, prominent in early 
history of New York Stock Ex- 
change, 11. 

Battles, on the exchanges, 216. 

Bear, W. E., cited, 125. 

Bears, their need of large reserves, 
84; do not all wish to cover at the 
same time, 131. 

Bearish, explained, 30. 

Bids and offers, 104. 

Bonds, compared with other con- 
tracts, 69; their value as a busi- 
ness man's reserve and for hedg- 
ing, 157; their availability for this 
purpose increased by recent legis- 
lation, 158. 

Book-keeping, saves transfers of 
cash, 41-42; neutralizes both 
demand and supply, 108. 

Boom, defined, 30. 

Borrowing, on the New York Stock 
Exchange, 36; facilities furthered 
by exchange markets, 142-43. 

Bourses, European, their account 
system, 32. 

Boycott, of one exchange by an- 
other, 222. 

Brazil, its valorization plan, 81. 

Break, defined, 30. 

Broad Street, New York, its curb 
market, 237-38. 



INDEX 



Brokers, on London Stock Ex- 
change, 25; their margins, 31-32; 

' interested in advancing prices, 
72-73, 93; cannot inquire into 
affairs of clients, 155; encourage 
speculation, 184; lead their clients 
on by advertisements and other 
persuasion, 185; reckless ventures 
are also encouraged outside the 
exchanges, 186; fined for con- 
tempt for not revealing names 
of clients, 191 ; bogus in a bucket 
shop, 236; should give names of 
parties with whom deals are 
made, 240; should not re-hypothe- 
cate stocks, 241 ; guilty of larceny 
in certain cases, 241; desire large 
margins, 245; commissions for 
large and small lots, 247. 

Bryce, James A., cited, 11. 

Bucket-shopping, not speculation, 
193; within the exchanges, 240. 

Bucket shops, sometimes pretend to 
be exchanges, 235; measures 
against advocated by Hughes 
Committee, 239-40. 

Bulge, defined, 30. 

Bull and bear, explained, 29. 

Bullish, explained, 30. 

Bulls, would not attempt to realize 
all at the same time, 131. 

Business, by whom should it be 
undertaken, 254. 

Business man, his lack of scientific 
training, 101; should leave to 
Wall Street the direction of trade, 
167. 

Buyer's option, defined, 34. 

By-product, resembled by risks 
taken on the exchanges, 170. 

Call, explained, 195. 

Cancellation of trades, in real es- 
tate transactions, 39; on the 
exchanges, 39-40. 

Captains of industry and finance, 
see conditions in advance of 
others, 165. 



Carrying charges, explained, 118. 

Cash transactions, defined, 32. 

Chamberlain, Lawrence, cited, 6. 

Chance, its abolition impossible, 4. 

Change Alley, stock-brokers doing 
business in, 10. 

Charlatans, mislead in speculation 
and elsewhere, 259. 

Chicago Board of Trade, incorpo- 
ration of, 13; evolution, of form 
of trading in, 14; its regular ses- 
sion, 20; opening range, 21; its 
availability as a place for hedging, 
24; its curb market, 53-54; its 
alleged violation of the Sherman 
Law, 263-64. 

Choppy market, explained, 30; pro- 
moted by organized speculation, 
54-55. 

Civil War in United States, import- 
ant event in history of exchanges, 
11; option system originated in, 
14; widened fluctuations in prices, 
58; speculation in gold at the 
time of, 232; effect of law prohib- 
iting such speculation, 233; its 
repeal, 233. 

Clearing-houses, wide application 
of the principle in exchanges, 45. 

Clearing-house sheets, recommend 
that they be kept for six years, 
240. 

Clews, Henry, cited, 48. 

Cliques, defined, 30; compared, 263. 

Close of market, 21. 

Coffee, effect on prices of valoriza- 
tion plan, 82. 

Coffee-houses, stock-brokers did 
business in, 10. 

Collateral loans, facilitated by con- 
tinuous market, 142-43. 

Commissioner of Corporations, Re- 
port on Cotton Exchanges, 58, 91. 

Commissions, the anti-optionist 
view, 121 ; by whom actually paid, 
121-123; smaller when a large bus- 
iness is done, 132; on exchanges 
relatively small, 169; jealousy of 



INDEX 



281 



exchanges, 221-222; on large and 
small lots, 247. 

Commission houses, belief that they 
are in league with market leaders, 
129. 

Commodity exchanges, special fea- 
tures in early history, 12; incon- 
veniences before their introduc- 
tion, 13; regulate contracts, 18; 
abandoning illegitimate methods, 
260. 

Competition, will appear where pro- 
fits are excessive, 206. 

Conant, Charles A., cited, 83, 162. 

Congressional Record, cited, 143. 

Cooperation, promoted by ex- 
changes, 220, 221. 

Consumption, reduced if prices are 
high, 74. 

Consumption basis, usually the 
bottom on organized markets, 
74. 

Continent, regulation of exchanges 
important, 17. 

Continuous market, the result of 
organized speculation, 141; of 
advantage in making collateral 
loans, 142; lacking in case of unor- 
ganized speculation, 226. 

Contracts, demand and supply of, 
68-80; can have value independ- 
ent of commodity called for, 68; 
parties who pay commissions for 
trading in, 122; kept more con- 
scientiously on exchanges than 
elsewhere, 197. 

Corn, its prices at different seasons 
compared, 116; prices compared 
with visible supply, 134. 

Corners, defined, 35; apprehension 
of, 72; not to be defended, 79; 
Leiter, 78-79, 119; dangerous to 
short seller, 79; Hutchinson, 80, 
119; in Erie, 89; avoided by sub- 
stitution of grades, 90; natural, 
130; where most numerous, 201; 
a special settlement price; advo- 
cated in cases of, 239. 



Corporations, not necessarily con- 
nected with Wall Street, 186-87; 
subject of execration, 255; possi- 
bilities, 255-56. 

Corporation wrecker, must in the 
end seek to build up values, 188; 
short selling gives special facili- 
ties for, 188. 

Costs, regulated by exchanges, 175. 

Cotton, its prices at different sea- 
sons compared, 116; prices com- 
pared with visible supply, 134. 

Cotton Exchanges, Report of Com- 
missioner of Corporations on, 
cited, 58; the system of grading 
used on, 90-92. 

Counterfeit markets, 235. 

Covering, defined, 35 ; helps to turn 
a bear to a bull market, 62; 
steadies the market, 127. 

" Crop-killing," its systematic use in 
manipulation, 192. 

Cross-trading, 194. 

Curb-trading, defined, 20; not sub- 
ject to much fluctuation, 53-54; 
the system prevailing in New 
York, 237. 

Davis, C. Wood, cited, 125. 

Dealers, on London Stock Ex- 
change, 25. 

Deliveries, on New York Stock 
Exchange, 32; on European stock 
exchanges, 33; in commodity ex- 
changes, 33; actual, may be in- 
sisted upon, 42; substitution in 
making, 90; not the criterion of 
morality, 181-83. 

Demand and supply, govern prices, 
67, 102; of contracts, 68; of " pa- 
per" wheat, 70-71; organized 
speculation increases demand 
more than supply, 76; of actual 
commodities important, 131-32. 

Differences, payment of, practice 
no different on exchanges than 
elsewhere, 38; compared with bal- 
ances in a ledger, 44; when paid, 



INDEX 



have their effect, 107; in real 
estate transactions, 40. 

Digestion of stocks and securities, 
defined, 36; first and last stages of, 
87; assisted by organized specula- 
tion, 164. 

Distribution, defined, 36. 

Dividends, their influence on the 
prices of stocks, 136. 

Division of labor, promoted by ex- 
changes, 220. 

Drew, Daniel, his frequent remark, 
78. 

Earnest money, synonymous with 
margin, 31. 

Education, the most important re- 
form, 252; the only reform that 
goes to the root of the evil, 257, 
265. 

Emery, Henry C, cited, 6, 28, 162. 

Employees of financial institutions, 
brokers should not accept their 
speculative accounts, 241. 

England, particular effects of organ- 
ized speculation observable in, 
88-89; seeking low prices for 
securities, 89; Royal Commission 
to investigate stock exchange, 
234. 

Equity, similar to margin, 31. 

Erie Canal, its completion a factor 
in commerce and speculation, 11. 

Erie, corners in the stock, 89. 

European stock exchanges, their 
special work, 12. 

Evasion of law, methods adopted 
by the Germans, 231; methods 
which could be adopted in this 
country, 231; methods always 
available, 231. 

Evolution of exchanges, among the 
ancients, 8; in England, 8-10; in 
New York, 10-11; of commodity 
exchanges, 12-14. 

Exchange Hall, business takes place 
in, 18; facilities of exchange con- 
verge toward, 20. 



Exchanges, Civil War important in 
their history, 10-11; special ac- 
tivities of European, 12; trading 
in, restricted to members, 16; 
memberships valuable, 17; form 
of organization in, 17; business 
done by shouting and gesticulat- 
ing in, 19; hours for business, 20; 
publicity in, 25-27; nervousness 
of market in, 52; highest evolution 
of trade, 60; fan speculative fever, 
64; force management of corpora- 
tions to improve, 87; their action 
especially beneficial to this coun- 
try, 87; not as favorable as re- 
gards some other countries, 87- 
89; action different as regards 
different classes, 88; commodities 
traded in must be representative, 
1 89; effects of concentration in, 
146; export basis, usually the 
bottom on organized markets, 74; 
exporters, their method of hedg- 
ing, 154; regulators of costs and 
profits, 175; publicity a feature 
of, 177; not necessarily connected 
with mismanagement of corpora- 
tions, 188; does not benefit from 
corporate mismanagement, 189; 
protagonists of honesty, 189; 
cannot be swept away by any 
fiat, 204; constitute a kind of 
underwriting organization, 208; 
their value to men of moderate 
means, 208-09; furnish a free 
field for competition, 213; their 
cavalier treatment of monopolists, 
216; battles on the floor, 216; 
introduce competing element, 
220; promote cooperation and 
division of labor, 221; their boy- 
cotts, 222; possibilities for reform 
of, 238; endeavor to snuff out the 
smaller, 243; their present repuls- 
ive aspect, 253; promise much for 
the future, 256-57; time needed 
for reform, 257; recent specula- 
tive excitement explained, 260. 



INDEX 



283 



Factory system, its introduction ac- 
companied by grave evils, 200. 

Farmers, their ideas of the specula- 
tive markets, 66; their discourage- 
ment previous to the Leiter cor- 
ner, 78-79; advocate the holding 
of agricultural products, 81; sell 
at high prices in corners, 106; 
advised not to speculate, 119; 
difficult for them to take advan- 
tage of corners, 119; their prefer- 
ence as to crops, 142; customers 
brought by organized specula- 
tion, 155; method of hedging, 157; 
can make carrying charges on 
grain by storing and hedging, 
158-159; their opposition to city 
dealers, 160; their condition fif- 
teen years ago, 172; complain 
that they do not get the bene- 
fit of high prices for food, 173; 
their adventures and failures, 183. 

Fee-receiving classes, 88. 

Financial Review, cited, 136. 

Flat, term defined, 37. 

Fluctuations, 51-52. 

Frauds, worst have been in unlisted 
stocks, 189: laws prohibiting, 263. 

Fraudulent orders, 24. 

Free trade, requisites of, 60. 

Freezing out, stock exchange not 
necessary in, 188. 

Fruits, wide fluctuations in the price 
of, 55. 

Future prices, advantage of an esti- 
mate by experts, 162; importance 
of such an estimate, 163. 

Futures, explained, 32; similar to 
contracts made outside the ex- 
changes, 33; compared to com- 
mercial paper, 122; perform same 
service as insurance policy, 155. 

Future wheat, can be created in any 
amount, 80. 

Gamblers, should the community 
avail itself of any service they 
may perform? 212. 



Gambling, its similarity to organized 
speculation, 138; not necessarily 
associated with number of trades 
made, 146; facilities provided by 
organized speculation, 181; con- 
trasted with insurance, 181; spirit 
of, shown in outside business, 
182-84; on the exchanges, its 
demoralizing effects, 198-99; 
brought to the attention of mo- 
nopolists, 217; perverted instinct 
of legitimate speculators, 223; its 
moral effect worse than specula- 
tion, 224; trades made in gam- 
bling spirit have evil effect, 234. 

Garfield, Commissioner of Corpora- 
tions, cited, 173. 

Germany, anti-bourse law, 231-32; 
its amendment, 232; its commis- 
sion to investigate bourses, 234; 
law for the registration of specu- 
lators, 242-43. 

Gold, speculation in, during the 
Civil War, 232-33; law prohibit- 
ing such speculation, 233; its re- 
peal, 233. 

Government, its attempts to bol- 
ster prices by making purchases, 
83; report on crops, 192-93. 

Grading of commodities, important 
in organized speculation, 16; 
prices of contract and non-con- 
tract grades, 75-76; substitution 
in making deliveries, 90-92. 

Great Britain, its stock of commodi- 
ties considered, 84. 

Gresham, Sir Thomas, built the 
Royal Exchange, 8. 

Gresham's Law, has its analogue in 
delivering commodities, 91. 

Guaranty companies, refuse to 
bond speculators, 199. 

Hand to mouth policy, its possibil- 
ity under modern conditions, 84. 

Hedging, defined, 23; not a cause of 
price depressions, 125-26; results 
in a balancing of interests, 126; 



284 



INDEX 



described by examples, 151-59; 
bonds used in, 157; its possible 
use in improving the condition of 
the people, 159; speculators un- 
consciously hedging each other, 
171. i 

Hill, John J., Jr., cited, 39, 236. 

" Hold your wheat " circular, 81. 

Hughes, Committee, Report on 
Speculation in Securities and 
Commodities, cited, 6, 236, 237, 
238, 239, 240, 241, 245; non-parti- 
san character, 262. 

Human nature, same in the pit as 
elsewhere, 46. 

Hutchinson, B. P., English dislike of 
him, 88; his corner in 1888, 119. 

Hypothecation of stocks, 31. 

Income of railroads, influence on 
prices, 136. 

Inconvertible paper currency, its 
effect on prices, 58. 

Independent, The, cited, 184. 

Industrial Commission Report,cited, 
131. 

Industrial securities, trade in them 
becoming important, 11. 

Insiders, supposed to control quo- 
tations, 53. 

Installment plan, means ultimate 
proprietorship, 246; often of great 
utility, 248. 

Insurance, a method of guarding 
against risk, 5; against fluctua- 
tions in prices of great value to 
small dealers, 169, 208-09; con- 
trasted with gambling, 181. 

International trade, ring settle- 
ments in, 42. 

Investment selling, the term a mis- 
nomer, 114. 

Investments, of savings. 248; the 
people turning from fraudulent, 
259; of small operators, 261. 

Jobbers, on London Stock Ex- 
change, 25. 



Joseph, purchases of corn in Egypt, 
8. 

Journal of Political Economy, cited, 
136. 

Journal of Royal Agricultural Soci- 
ety, cited, 125. 

Lambs, term defined, 47; shearing 

their wool, 50. 
Larceny, brokers should be held 

guilty of, in certain cases, 241. 
Large scale production, its advan- 
tages and disadvantages, 207. 
Legislators not likely to scalp the 

market, 191. 
Legitimate speculation, the only 

acceptable alternative to present 

conditions, 252. 
Leiter, Joseph, his corner, 79; his 
• methods disliked in England, 88; 

effect of corner on prices, 119. 
Limited orders, 22. 
Liquidation, defined, 35; helps to 

turn bull into bear market, 63; of 

ill-judged business ventures, 144. 
Listed stocks and securities, sell at 

high prices, 77. 
Listing of stocks and securities, 

explained, 17; tends to prevent 

mismanagement in corporations, 

189; recommended by Hughes 

Committee, 238. 
Loan crowd, 36. 
Loaning rate, 37. 
London Stock Exchange, its early 

history, 10; panic of 1890 on, 12; 

classification of members, 25. 
Long contract, can be turned into a 

solid investment, 115. 
Longs, defined, 35; their interest in 

putting up prices, 108. 

Manchester Cotton Exchange, 88. 

Manipulation, by matched orders, 
24; must be in conformity to pre- 
judices of traders, 72-74, 112-13; 
taking advantage of the prejudice 
of speculators, 93; of a corner. 



INDEX 



285 



105; must frequently put up 
prices, 112-13; popular belief in 
regard to, 129; made subject of 
inquiry on stock exchange, 145; 
may be welcomed by manage- 
ment of corporations, 187; tends 
to cure its own ill effects, 188-89; 
by lies, 191-93; mixed indistin- 
guishably with legitimate trading, 
210-11; facilities for, on an ex- 
change, 239; temptation for, in 
amateurism, 242. 

Margin plan, encourages reckless 
borrowing, 246. 

Margins, defined, 31; smallness of, 
32, 51, 244; larger advocated, 
244-45. 

Marketing, methods used for com- 
modities sold on exchanges, 217; 
for those not used thereon, 218- 
20. 

Market leaders, encourage bullish- 
ness in public, 104; their supposed 

i affiliations, 126; able to predict 
conditions, 133; conform to legiti- 

t mate tendencies, 138; blame stock 
exchange unjustly, 145. 

Markets, method of broadening, 60; 
two-sided, 60-63; organized and 

• unorganized, 61; effect of two- 
sided neutralized, 64; continuous, 
the result of organized specula- 
tion, 141; continuous, of advan- 
tage in making collateral loans, 
142; counterfeit, 235. 

Matched orders, defined, 24; rule 
suggested to prevent, 241, 263. 

Melons, use of the word to lead on 
speculators, 190. 

Memberships on exchanges, often 
very valuable, 17. 

Mercantile exchange, 236. 

Mercantilists, their futile efforts, 
128. 

Merchandising, contrasted in differ- 
ent commodities, 155. 

Merrill, John C. F., cited, 76. 

Metal Exchange in New York, 237. 



Mid-session, its comparative quiet, 
21. 

Milking the market, accomplished 
by false rumors and manipula- 
tions, 190-191. 

Millers, their profits, 118-19, 174- 
76; their method of hedging, 151- 
52; when hedging do not necessar- 
ily insist on actual deliveries, 153- 
54; would control wheat trade if 
speculation were abolished, 210. 

Mitchell, Wesley C, cited, 136. 

Mixed husbandry, contrasted with 
single crop farming, 142. 

Monopolists, would be glad to carry 
risks undertaken by exchanges, 
170; should not be allowed to de- 
stroy an institution that protects 
the small business house, 209; if 
given full control, amateurs could 
not run risks, 211: their advocacy 
of anti-option laws, 217; their 
method of buying, 218-20; stock 
exchange could help to make them 
innocuous, 248. 

New Orleans Cotton Exchange, its 
system of grades and deliveries, 
91. 

New York Coffee Exchange, its 
incorporation, 14. 

New York Cotton Exchange, its 
incorporation, 14; its system of 
grades and deliveries, 91; its by- 
laws amended, 92. 

New York Independent, cited, 184-85. 

New York Produce Exchange, origin 
traced to Dutch occupation, 14. 

New York Stock Exchange, its or- 
ganization, 10; not incorporated, 
17; listing of stocks in, 17; regu- 
lates engraving and issuing stock 
certificates, 18; posts around 
which trading takes place, 19; 
its regular session, 20; opening 
ranges, 21; the intentions of its 
founders, 24; deliveries upon, 32; 
borrowing stock, 36; compared 



INDEX 



with European bourses, 182; its 
constitution, 237; its rules as 
regards employees, 241; as to the 
unit of trading, 241; recent specu- 
lative excitement upon, 260-61; 
incorporation advocated for, 263. 
Non-speculative grades, their spe- 
cial advantages, 74. 

Odd lots, dealing in, should be en- 
couraged, 247. 

Offers to sell, no more easily made 
than offers to buy, 104. 

Opening of the market, 21. 

Opening range, 21. 

Option, defined, 33; as used in real 
estate transactions, 195. 

Orders, facilities for execution of, 
21; quickness in executing, 22; at 
the market, 22, 52; resting orders, 
22; stop loss, 22-23; hedging, 23; 
result of, 24; fraudulent, 24; 
matched, 24. 

Organized speculation, definition, 8; 
evolution, 8-14; commodities 
suitable for, 15; raison d'etre of 
fluctuations in prices, 16; culmi- 
nation of inventions for gathering 
commercial news, 27; its lan- 
guage, 29; modern accounting 
methods in, 44; great number of 
transactions in, 46; check on 
movement of prices, 61-62; its 
effect in creating demand, 76; 
causes price advances, 81 ; does not 
affect all nations in the same way, 
88-89; adds both to demand and 
supply, 103; furnishes a demand 
at marketing time, 115-17; its 
effect on the profits of millers, 
118; exists to make prices, 126; 
similarity to gambling, 138; as- 
sists in the operation of our reserve 
system, 44; specializes makers of 
world prices and of local prices, 
160-61; its good effects best seen 
after it has done its work, 164; 
husbands resources, 176-77; its 



publicity, 177; affords facilities 
for gambling, 180-81; many 
abuses can be traced to its new- 
ness, 200-01; reforms not only 
itself but other kinds of commerce, 
202; its faults involve moral 
evils, 203; kind of reforms 
needed, 204; underlying principle, 
204; at the worst it has its uses, 
224; number of those who use it 
rightly must be increased, 233; 
one effect of restrictive measures, 
243; cannot be developed by 
rules and prohibitions, 249; its 
possibilities in utilizing a know- 
ledge of economics, 250; its legiti- 
mate use should be encouraged, 
252; its grave evils, 253; is tend- 
ing in the direction of the best 
. ideals, 257; progress remarkable, 
258; how it is showing its value, 
261-62; its place in the commer- 
cial system, 262. 

Outside business, compared with 
exchange business, 198. 

Outsiders, their belief that organized 
speculation depresses prices, 66. 

Outside markets, commodities han- 
dled many times, 146. 

Over-extension in business, its dan- 
gers, 227-28. 

Packers, their profits, 173; buyout- 
side exchanges and sell in ex- 
change markets, 174. 

Panics, defined, 30; danger of, 44; 
buying in, 48; relief given by stock 
market, 144; stock exchange 
accused of producing, 144; stock 
exchange guards against, 145; 
not always founded on business 
conditions, 167; progress shown 
in 1907. 

Paper representatives for commod- 
ities, 60. 

Paris Bourse, constitution of Par- 
quet, 17. 

Patten, James A., mobbed in Eng- 



INDEX 



287 



land, 88; his controversy with 
Secretary Wilson, 98. 

Periodical press, its importance in 
distributing quotations and news, 
26; its educative influence, 258. 

Pillsbury, Charles A., his idea of the 
effect of organized speculation 
on seasonal prices, 118; cited, 
174-75. 

Pit, description of, 18; human na- 
ture in, 46. 

Point, explained, 80. 

Policy of insurance and future con- 
tracts perform the same service, 
155. 

Pools, explained, 30. 

Prejudice against speculation, 8. 

Premiums on stocks, 37. 

Prices, range of, 55-59; danger in 
forcing below natural values, 72; 
three important tendencies illus- 
trated, 94; common assumption 
that only one factor can affect, 96; 
determined by demand and sup- 
ply, 102; interest of manipulators 
in advances, 113; in corners, 119; 
fluctuations not always legitimate, 
126; unnatural methods outside 
the exchanges, 126; determined 
by supply and demand, 132; move 
sooner than visible supply, 133; 
rise and fall inversely with visible 
supply, 132, 133; of stocks vary 
with legitimate influences, 135; a 
concomitant of civilization, 162; 
direct trade and industry, 162- 
63; fixed upon the exchanges, 
express the true value of securi- 
ties, 164; indicate the course of 
trade, 166; effect of their rise, 
260. 

Privileges, explained, 194-95; not a 
good hedge, 196; do more good 
than injury, 196-97; their elimi- 
nation as a means of discouraging 
small traders, 243. 

Production, increased if prices are 
high, 74. 



Professional speculators, described, 
47-49; have greater financial 
strength than outsiders, 114. 

Profits, regulated by exchanges, 175. 

Promises to deliver commodities, 60. 

Promoters, affiliated with stock ex- 
changes, 214; {anxious to have 
their stocks listed, 77-78; their 
views contrasted with those of 
farmers, 78. 

Public are always bulls, 104. 

Publicity, on the exchanges, 26, 
177-78, 238; favored by Hughes 
Committee, 239. 

Pujo Committee, investigating the 
"Money Trust," testimony cited, 
222; result of report of, 265. 

Puts, explained, 195. 

Pyramiding, described, 245. 

Quotations, how marked down, 24; 
method of sending out, 25; their 
legitimacy, 128-31; fictitious, 236. 

Railroads, when first built were poor 
investments, 86. 

Real estate, cancellation of trades 
in, 39; rings in, 41; wide fluctua- 
tions in price of, 55, 109; suddenly 
becomes unsalable, 141 ; methods 
used in trading in, are condemned 
if used on the exchanges, 195; 
misery caused by speculation in, 
226-27. 

Re-hypothecation of securities 
against the wish of owners, 241. 

Reserves, must be large if there be 
short selling, 81; if large, a bear 
argument, 83; rendered necessary 
by short selling, 84; cause con- 
sumption of commodities, 85; 
tend to grow larger each year, 85; 
loss of weight in, 85; large, at- 
tracted by organized speculation, 
177. 

Resting orders, explained, 22-23. 

Ring settlements, examples of, 40- 
42. 



288 



INDEX 



Ringing out, accomplishes the settle- 
ment of future contracts, 131. 

Risks, found everywhere, 4 ; guarding 
against, 5; segregation of, 6; costs 
of, 169-71; should they be borne 
by monopolists or speculators? 
210-13; in outside business, 227- 
30. 

Room traders, 25. 

Rothschild, Nathan Mayer, his 
speculations, 10. 

Royal Commission to investigate 
stock exchanges, 234. 

Royal Exchange, a new type at 
time of opening, 8; separation of 
interests represented upon, 9. 

Rumors, effect of, 53; scalping the 
market by aid of, 189-90. 

Salaried classes, 88. 

Sales, fallacy arising in use of the 
word, 100-01; use of word as syn- 
onym with transaction, 102. 

Sample transactions, facilities for, 
18-19. 

Sao Paulo, Brazil, its valorization 
plan, 81. 

Scalpers, defined, 48-49; profession- 
al, 49; equalize the market, 49; 
can use privileges, 196. 

Season for marketing, natural that 
prices be low, 115. 

Sellers, defined, 22. 

Sellers' option, defined, 33-34. 

Settlements, no philanthropy shown 
in making, 105; in case of a corner, 
106. 

Settling price, its conveniences, 42. 

Sherman Law, alleged violation of, 
by Chicago Board of Trade, 263- 
64; probable revision of, 265. 

Short contract, temporary specula- 
tion, 114. 

Short selling, defined, 34; market in 
which it is absent, 60-61; brings 
runaway market to a halt, 61; 
extensive, implies large reserves, 
81; its possible use by a member 



of a pool, 82; renders large sup- 
plies necessary, 83-85; too much 
attention given to it, 100; no 
greater effect than long buying, 
100; its dangers, 105-06; steady- 
ing effect when shorts are covered, 
127; furnishes special tempta- 
tions to corporation wrecker, 188; 
necessary to a free market, 205; 
effect of abolishing, 109, 205; 
must be retained, 233; rank and 
file of speculators learning its use, 
260; its abolition proposed, 263. 
Shorts, defined, 35; purchase in a 
panic, 62-63; their apprehensive- 
ness, 93; contrasted with longs, 
78; causing advances in price, 
84-85; their interest in depressing 
prices, 108. 
Single crop farming, contrasted 

with mixed husbandry, 142. 
Slump, explained, 30. 
Smith, Charles W., cited, 103. 
Socialism, looks with horror upon 

gainful trade, 146. 
Specialists, should not be allowed 

to deal for own account, 240. 
Specialization of different kinds of 

price makers, 163. 
Speculation, definition, 6; in com- 
modities, a later development 
than speculation insecurities, 201. 
Speculative business, the gambling 
spirit called forth by, 182-84; 
compared with organized specu- 
lation, 228-29; more dangerous 
than organized speculation, 230. 
Speculative directors, temptations 
to speculate, 187; forced into the 
market, 187; spreading false 
rumors, 189; manipulate the mar- 
ket by false rumors and myster- 
ies, 190-91. 
Speculators, bear certain risks, 5; 
their function compared with that 
of insurers, 6; distribute demand 
and supply over different periods 
of time, 6; their business not 



INDEX 



essentially different from that 
of others, 15; classified, 46; 
amateur, 47; professional, 47-49; 
who scalp the market, 48; who 
depend upon fraud, 49 ; greedy and 
impatient, 52; excitability and 
recklessness of, 64; their limita- 
tions, 66: their temper, 71-72; 
have not sufficient money to mar- 
gin short wheat to the extent sup- 
posed, 79; their services in carry- 
ing large supplies of commodities, 
84; professional are frequently 
bears, 112; but are sometimes 
bulls, 113; how they settle their 
contracts, 131 ;their qualifications, 
149; indicate proper value before 
investors are willing to act, 163; 
successful, initiate market move- 
ments, 165-66; unskilled, run 
risks from love of gambling haz- 
ards, 171; legitimate and counter- 
feit compared, 180; led on by 
advertisements of brokers, 185; 
more influenced by mysteries 
than by facts and figures, 190; 
not willing to admit their own 
folly, 198; their type of mind, 214; 
their cause of failure, 223; test of 
fitness impracticable, 242; at- 
tempted registration of, 242-43; 
poor, should have a chance to 
grow up in business, 244; chance 
of success increased by large mar- 
gins, 245; learning to sell short, 
260. 

Spotty or spotted market, 30. 

Spot transactions, 32. 

Statements of financial condition of 
corporations, 239. 

Stock book, 43. 

Stocks and securities, when listed 
sell at high prices, 77; their 
sale to speculators, 87; admitted 
that speculation puts their prices 
up, 98; prices vary with legiti- 
mate conditions, 136; made liquid 
by organized speculation, 144; 



brokers should not lend or re- 
hypothecate, 240-41; broker 
guilty of larceny if he sells stocks 
belonging to others without their 
consent, 241; size of holdings 
large, 247. 

Stop orders, explained, 22-23; not a 
feature in outside business, 23; 
furnish an incalculable element, 
52. 

Strong market, 30. 

Substitution, in outside business, 
37-38; upon an exchange, 38. 

Sulzer, Gov., his recommendations, 
265. 

Supply and demand, the determin- 
ing element, 130-32. 

Swindlers, selling stocks to the 
people, 248; the people turning 
from them, 259. 

Syndicates, defined, 30; possibility 
of one member selling out, 82. 

Tape, explained, 26. 

Tape game, a form of bucket-shop- 
ping, 236. 

Technical position of market, 69. 

Telegraph companies, should pub- 
lish names of subscribers to ticker 
service, 240. 

Ticker, explained, 26; news, 51; 
should it occupy a place in cap- 
itol buildings? 191; regulations 
suggested by Hughes Committee, 
240. 

Tip, defined, 30. 

Tobacco, method by which it is 
bought, 218-19. 

Trade, should not be restricted, 126. 

Traders, discouraging those with 
small capital, 243-44. 

Trading, great amount of it intro- 
duced by organized speculation, 
108-09; not necessarily illegiti- 
mate, 146. 

Trusts, their wide prevalence, 129; 
driven to bankruptcy by small 
business houses, 206; natural 



290 



INDEX 



tendencies will in time settle 
abuses of, 207; should have no 
adventitious aid, 208; formed by 
those who wish to escape risks, 
214; sometimes overshadow ex- 
changes which thwart them, 214; 
the transformation going on, 261. 

United States Senate, Sen. Doc. No. 

372, 2d Sess. 59th Cong., cited, 

218-19. 
United States Steel Corporation, 

sale of its shares as a hedge, 156- 

57. 
Unloading, defined, 35. 
Unorganized speculation, extreme 

price movements, 61 ; points in its 

favor, 225-26; objections to it, 

226-27. 
Unskilled, their participation not 

desirable, 151. 

Valorization, history of, 81-82; 
attacked by United States Gov- 
ernment, 82. 

Visible supply, indicates price vari- 
ations, 132; of wheat, 133, 270; 
of corn, 134, 271; of cotton, 135, 
272. 

Wage-earners, their position when 

prices are high, 88. 
Waiting orders, defined, 22; their 

effect upon the market, 53. 
Wall Street, has developed the pro- 



ducing power of the country, 11; 
building railways its most impor- 
tant work, 11; created a demand 
for railroad stocks, 85; more 
recently has developed industrial 
securities, 11; as a place of tem- 
porary investment, 144; predicts 
values of groups of securities, 
164-65; predicts business move- 
ments, 166; makes some false 
prophecies, 167; makes correct 
prophecies in spite of wishes of 
its leaders, 168; not necessarily 
connected with corporations, 186- 
87. 

Warehousemen, their method of 
hedging, 154. 

Warehouse receipts, used in making 
deliveries, 16; may not be issued 
in excess of the amount in store, 
80. 

Wash sales, defined, 24; used to 
induce speculation, 86. 

Weak market, defined, 30. 

Wheat, its prices at different sea- 
sons compared, 116; prices com- 
pared with visible supply, 132; 
prices move inversely with visible 
supply, 133. 

Wilson, Secretary, his controversy 
with James A. Patten, 98. 

World value and local value differ- 
entiated, 160-61. 

Yale Review, cited, 148. 



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